The Importance of Billing Rate in Accounting Practice Acquisition

Billing rates discussion during a practice acquisition is a common topic. If the billing rate of the buyer is materially different from the seller’s rate, the buyer has to make some decisions. Should he raise his rates existing rates to match that of the seller? Should he lower the seller’s rates when they bring on the new clients? Should he make no change at all?

If there is retention in the deal, the billing rates need to be addressed in the contract. A seller should not execute a purchase agreement that is tied to retention without first clarifying what is happening with the billing rates. Otherwise, the new buyer could increase rates on the clients of the firm to be acquired causing retention to fall.

If the buyer is lowering the acquired firms rates to match their own, there are a number of unintended consequences. Upon initial look, it looks like that might help with retention but you really have to look deeper. If the buyer is lowering the rates to the acquired firm’s rates, it implies one of two things. The first is that the selling principal must have been overcharging. The second is that the acquiring firm must have less experience and expertise.

Depending on the nature of the clientele, these client assumptions must be considered. For firms where the practice is more of a ‘retail 1040 practice’ with clients on the lower end of the income scale, a drop in rates is probably a good thing for retention.

However, if the client mix is more complex with higher incomes, multiple returns, and schedules, the fee decrease may actually have the opposite effect. High profile clients are happy to pay for the expert tax advice and the fee for the return is the least of their worries. They will want someone with significant complex tax experience. Lowering rates in this setting could set an expectation with the clients that the new firm has less expertise, causing them to search out a new tax professional.

As always, working together alongside a strong transition plan can mitigate some of these potential trouble spots.


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