20 Dec, 2013

Buying, Selling a Practice? test

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Listing Number : CA200001 
Location : LOS ANGELES 
Annual Gross : $90,000 
Asking Price : $110,000 
Status : Sold 

California CPA magazine: March/April 2008

At some point in their careers—if not at many points—a CPA’s thoughts turn to the future as they attempt to answer questions about their practice. An aging firm without a successor might look to be acquired. A small- or mid-sized firm, with focused specializations and limited recruiting capabilities, looking to grow may want to buy. These, and other, personal- and business-related factors all play a part in the decision to either take the firm to another level—or walk away from the game.
The following are some pointers from CalCPA members with experience from both sides of the equation.

Shopping Around: Finding the Right Match

By Joseph C. Kovar, CPA/PFS
There are many reasons you might decide to buy a practice: to expand services, establish a succession plan or simply because it makes economic sense, are just a few. Sweeney Kovar Investment Advisers has acquired and merged four CPA firms into our practice over the past 15    years. Whatever your reason may be to buy a practice, one thing to keep in mind is patience. Each deal our firm has been involved in has taken anywhere from one to three months, depending on the seller’s motivation.
   While each deal is different, the following factors are critical to a successful merger:
1. To determine whether there’s a match,  review the seller’s tax and accounting files  for quality control, and review the billing  files to determine if the firm bills similar  amounts for similar services. Historically,  our firm has looked for CPA firms that are smaller than we are and offer similar services. 
2. Look for a CPA firm that is located  in the same geographic area as your  firm. This will allow moving the practice  into your office without causing a major disruption to the new clients. There’s also  an economic benefit in an acquisition when  you can avoid adding overhead costs for a  new location.
3. Look for a seller that is willing to spend the  time to ensure the hand-off goes smoothly.  Sellers must understand it’s in their  financial interest to spend enough time,  be it days or weeks, to provide proper  introductions between staffs and clients,  and to ensure that the former clients are  comfortable with the new CPA. This helps  the seller because the final purchase price  is dependent on the billings that can be  transferred to the acquiring company. 
4. If possible, structure the timing of the  purchase for the fall to allow enough time  to prepare the office and tax software for  new clients. This also provides sufficient  cash flow as tax season brings in the majority of the cash receipts.
5. Look for firms with clients that can  benefit from other services your firm may  provide, such as financial planning or  advisory services.

Structuring the Purchase Price

We generally use the following method:
1. The seller will typically represent the  annual billings of the practice. As the  acquirer, verify the reasonableness of this  amount by reviewing financial statements,  tax returns and the like. Based on the representation of the billings, a conditional  purchase contract can be established (the  final purchase price will be calculated based  on collectable billings as described below). In our experience, the purchase price is  typically calculated using a multiplier of between 1–1.2 times (but can reach as high  as 1.5) the annual billings, depending on  whether the seller is using the services of a  broker. Note that these multipliers may not  be appropriate for larger size firms, in  which case the multiplier would be smaller. 
2. Typically, the seller will request a down  payment of 30 percent to 50 percent of  the total purchase price. The seller then  carries a note (with market rate interest)  for the balance of the purchase price,  generally over a three to five year period.  The purchase price is adjusted based on the  actual amount on collectable billings over  the subsequent 12-month period. 
  For example: A seller represents that his  practice has $300,000 in annual billings. Using a multiplier of 1.1, this results  in a total purchase price of $330,000. In addition, the seller requests a down  payment of $150,000, leaving a note  payable to the seller of $180,000. If the collectable billings over the subsequent 12  months amount to $270,000, the purchase  price would be adjusted downward to  $297,000. Finally, since the seller has  already received a cash payment of  $150,000, the note payable to the seller  would be adjusted from the original  $180,000 to $147,000.
3. It’s important to note that any subsequent  loss of clients after the first 12 months does not affect the contract price. So, establish  a good relationship and reasonable fee  structure with the new clients during the  first year. 
   Acquiring or merging another CPA firm can be an effective way to grow and introduce new services to clients. However, the acquiring firm needs to do its homework to determine if the firms and clients are compatible.
Joseph C. Kovar, CPA/PFS is a partner with Sweeney Kovar Investment Advisers. You can reach him at joe@cpask.com.

On the Block

By Brenda Calkins, CPA
Selling your CPA practice may be the most difficult career decision you make. It was for me. After investing so much of yourself into building your practice you have a deep sense of commitment and attachment to your clients. Therefore, knowing when the time is right to sell is as important as knowing where and how to start. 

A Personal Choice
You may want to sell your practice and, after a minimal amount of transition time, no longer be involved. Or you may be a sole practitioner looking for more of a partnership, where your new partner will eventually buy you out after an agreed upon amount of time. Or you may want to sell your practice and work for the CPA firm that acquires it. These are just three options to consider. Which one you choose will be unique to you and your buyer. 
   The most important thing to remember when starting a negotiation with a potential buyer is to get a letter of intent so both parties clearly understand what’s happening. Don’t leave it to chance with a verbal understanding. Also, if you’re going to be involved in the practice after the sale, you’ll want to consider the buyer’s practice philosophy, work ethic and personality to make sure it will be a good fit.

The Price is … Right?
The next decision you’ll need to make is deciding upon your selling price—and if you’re going to adjust that price over a specific time period. 
For example, you may initially sell for 1.2 times the first year’s gross receipts and then adjust it at one year after the sell date. (The multiplier can vary between 1–1.5.) Another option is to sell at a percentage of each year’s gross receipts over an agreed upon time period following the sale. Or, more simply, you could fix the selling price as of the date of sale. 
   For the seller, I would recommend fixing it as of the date of sale—you never know what the buyer could end up doing with the client base and you don’t want those decisions to affect you. 
   The next matter to consider is what financial terms you desire. Again, you can have as many choices or as much creativity as you and your buyer agree upon. You will most likely need to provide your buyer with a set of financial statements, probably for the immediately preceding one to three years, depending on the buyer. Before providing a potential buyer with proprietary information, however, you should get a signed non-disclosure document. I would also recommend getting a credit report on your buyer, which could assist you in determining their credit worthiness in case you decide to sell with financing terms and carry a note receivable. 
   At this point in the process you should involve a practice broker, who can assist you with the paperwork and make recommendations regarding terms, selling price and any other matters involving the sale such as an employment agreement, promissory note or a buy-sell agreement. I strongly recommend that you use an attorney to review all documents before finalizing the deal.

Passing on Unfinished Business

Something else to consider is what the buyer will owe you for any work in process. When I sold my practice I made sure there was little or no work in process as of the closing date to facilitate a smoother transition and not delay the deal. 
   Moreover, you will need to provide the buyer with the list of assets you are selling, as well as any prorated reimbursements you are owed for prepaid expenses like advertising, memberships in local organizations, software licenses, insurance, etc. The reimbursement for these costs should be separate from the selling of the goodwill except for the fixed assets. 

The Walking Papers
After you decide to sell your practice, find a buyer, determine an asking price and decide how you want to finance the sell, all that is left is the paperwork, which typically included the buy/sell agreement, closing documents and promissory note. I recommend using a CPA practice broker and an attorney who has experience in the sale or purchase of businesses to prepare the documents.
   After the legal documents have been completed, notify your clients of the sale and introduce the buyer. The communication, whether in person or in a letter, should be written in such a way to relate to the clients how positive the change can be for them.    

Brenda Calkins, CPA is a manager at Smith Marion & Co CPAs. You can reach her at bcalkinscpa@verison.net.

Mergers & Acquisitions

Heard horror stories about a merger or acquisition that went wrong? Maybe spending a little extra and hiring some help with the process is a good idea. Here are some questions a CPA could ask a potential representative or broker:

Should I consider giving a retention guarantee when selling my practice?
While there might be good reasons for selling for a fixed price, a seasoned broker will know that a fixed price is only possible in highly competitive circumstances. In my opinion, if you’re set on selling for a fixed price, you’re significantly limiting your buyer pool. Most buyers, including some that may be the best buyer for your practice, will not consider purchasing a practice without some type of revenue guarantee.
What is your closings to listings ratio?
Not even the best broker will have more than an 80 percent success in selling all of their listings, but it should be greater than 50 percent. Some brokers will list 50 or more practices for sale in a given year, but sell fewer than 25. Another broker may take 40, but sell 30. Remember: it’s not the number of listings that’s important, but the number of sales.
Are CPA firms the only or primary type of business you sell?
Some brokers sell many types of business, including dental, chiropractic or other professional services. Accounting firms are unique enough to require a specialist to offer the necessary services.
How do you educate the buyers and sellers in the process of selling a practice?
Most qualified brokers will have resources specially designed to educate clients, including books, reports, contracts and seminars. 
Do you have staff?
Most high-quality practice brokers have a staff dedicated to marketing and servicing its clients. It would be very difficult for a single individual to offer the quality of service necessary to compete in today’s market.
What is your experience? Are you a member of a trade association? Do you hold any accreditations?
While being a CPA is not required for being a CPA practice broker, qualified brokers should have extensive background in business and be an active member of several trade associations.
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