What Buyers Look for in an Accounting Practice

What a buyer is paying for

Buyers of practices usually quote the price against yearly billings instead of earnings, because billings are easier to verify and because the buyer expects to run the practice with their own cost structure. That makes the quality of the billings the whole conversation. Recurring work counts for more than one-time work. Monthly bookkeeping, payroll, quarterly filings and annual returns for the same clients every year are worth more per dollar than a project done once for a client who may never come back.

The mix matters too. A practice built on individual returns is steady but pays modestly per client. A practice with small business clients, where the firm does the books, the payroll, the sales tax filings and the tax return, tends to hold clients longer because the firm is woven into how the client operates. Advisory work, such as planning, entity questions and help with lenders, adds to the value when it comes back each year and can add to the risk when it depends on one partner's judgment.

Buyers will also ask what the practice looks like in a quiet month. Tax work is seasonal, with the busiest weeks in the spring and again around extension deadlines, and a practice with year-round bookkeeping and payroll work smooths that out. They will want to see billings by month for several years.

Client retention is the main question

Every buyer will ask how many clients stay from one year to the next. A practice that keeps most of its clients, loses a few to retirement or moves, and replaces them through referrals looks sound. A practice that has lost a number of clients in the last two years looks like it has a problem, and the buyer will want to know why.

The list itself comes under review. A buyer will ask for client names, services provided, fees billed, years with the practice and who the client's main contact is inside the firm. They will look at concentration. If a handful of clients provide a large part of the billings, the buyer will want to know what happens if one of them leaves, and our post on customer concentration describes how that affects price.

Referral sources get looked at as well. Where do new clients come from? Attorneys, bankers, real estate offices and other clients are all common answers. If most introductions come to the owner personally, a buyer will want those people to meet the successor before the sale closes.

The owner and the staff

In a practice this size the owner is usually the face of the firm, and clients often stay because of the relationship. A buyer knows that and will plan around it. Most deals include a transition period where the owner introduces the buyer to clients, stays involved through at least one busy season, and helps move the work over. How long that lasts depends on the practice. Our post on how long you stay after the sale goes through the usual shapes.

Staff are worth a lot. A practice with experienced preparers, a bookkeeping lead and someone who handles client communication is worth more than a practice where the owner prepares every return after hours. Buyers will ask who holds a credential, who is an enrolled agent, who is licensed as an accountant, how long each person has been with the firm, and what they are paid. Licensing rules for who may own a practice vary by state, so your attorney confirms what applies and which buyers qualify.

Some buyers are other practices that want to grow and have the capacity to absorb the clients. Others are individuals leaving a larger firm. Both can be good, and the structure of the offer differs, so the buyer types post is useful before you decide how to approach the market.

Records a buyer will ask for

Expect requests for the practice's own tax returns, profit and loss statements, a balance sheet, and a billing report from your practice software that ties to them. Buyers will want fee schedules, engagement letters, the list of clients with services and fees, accounts receivable and work in progress, payroll records, and the staff roster with credentials.

They will ask about software and systems: the tax preparation program, the practice management system, the document portal, the cloud storage and the security setup. A buyer will want to know that client files are organized, that prior-year returns and workpapers can be found, and that e-file credentials and professional registrations are current for everyone who signs. They will ask about liability insurance and any past claims or notices from tax authorities.

Client confidentiality shapes how this is shared. Before client names are disclosed, the buyer signs a nondisclosure agreement, and the early materials usually describe clients without identifying them. Transfer of client files to a buyer has its own consent requirements that vary by state, and your attorney confirms what applies.

What has to transfer

The assets of a practice are mostly intangible. The client relationships transfer through notices and introductions, and the engagement letters usually need to be reissued under the buyer's name. Client records have to be handed over in a way that satisfies professional rules and the client's wishes. The office lease, if there is one, may need the landlord's consent, and the lease post explains how that tends to go. Software licenses, phone numbers, the website and the domain should be listed and checked to make sure they belong to the practice and not to the owner personally.

Many sales are structured with part of the price tied to how many clients remain after a set period. That protects the buyer from paying for clients who leave, and it gives the seller a reason to help with the transition. Our post on earnouts and holdbacks describes the common forms. Seller financing appears often as well, and seller financing is worth reading before you form an expectation of how much cash arrives at closing.

What tends to sink a sale

Practices fail to sell for familiar reasons. The owner waited until the last year before retirement and had no time to build the staff. Fees had not been raised in a decade, so the billings looked low and the buyer saw a repricing risk. A few large clients came with questionable books of their own. The records were scattered across personal laptops and paper files. The owner had told clients the practice was for sale before the deal was signed, and several of them started looking at other firms.

How to prepare

Start a few years out if you can. Raise fees where the market supports it, and see how clients respond. Put the staff in front of clients earlier so the relationships are not all with you. Clean up the client list, and decide whether to let go of the clients who cost more than they pay. Move paper into organized electronic files. Write down how engagements are scoped, priced and billed.

When you are ready to talk, we at Business Advisors of America start with a valuation built from your own billings and client data, then prepare a package that a buyer and lender can follow without identifying your clients. If you would like to see how buyers look at selling an accounting and tax practice, that page is the place to start, and a short call with us is the next step.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.