The Difficulty in Selling Small Accounting or CPA Practices

Accounting Practices that are less than $150,000 often receive a lower multiple and can be more difficult to sell and transition than practices with more critical mass. While there is plenty of demand for small practices, the cash flow of small firms do not support the incoming principal, the exiting principal, and the cash needed to support the debt financed acquisition. We have blogged extensively about the need for a robust transition plan and how the need ties to both the financial success of the deal as it relates to both the incoming and retiring principal. There are numerous factors to consider with accounting practice sales as a whole, and having an effective CPA exit planning strategy will help create a win-win transaction for the seller and the buyer.

In a firm with $150,000 of gross revenue, the ultimate cash flow margin is likely to be in the 40%-60% range. This means that on average there is approximately $75,000 of cash flow in a business of this size. That cash flow needs to support the debt service, salary for new owner, and transitional costs. This leaves no money to pay the retiring principal for his help in the transition. For this reason, we often see lower retention numbers because of little or no transition help from the seller.

There is a large degree of risk to retention without seller involvement and with all of the other costs that must be paid; a small practice that does not transfer well can find the organization itself in jeopardy without the critical mass needed to survive. The practice may struggle to even cover the fixed costs required for operation.

Buyers should consider reducing their own income in year one while the transition is taking place, if possible. It is really important to have the seller involved in some manner during the first tax season, if at all possible.

For other nuances that will impact small practice acquisition, speak to a Phoenix business intermediary for help and guidance on the steps required in selling a CPA practice or accounting practice.

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