How to finance the purchase of an accounting & CPA firm
Speaker 1: How are these deals finances? What’s the process to getting the institution or the group, from a lender perspective, what’s kind of the cash needed, more or less, to get the acquisition going? How does that look from a financial perspective?
Speaker 2: I was going to say, just to start off, very, very rarely have we ever done what’s called an immediate sale where someone will write you a check for half a million dollars and say, “Thanks, David. Give me the keys to the front door.” Because as you and I have both mentioned, the problem lies with client retention. All of a sudden, they see me sitting there instead of you, chances are they’re not gonna be there.
As far as money up front and financing, the four things that you must have in any successful merger, we like to call them the four C’s. There’s chemistry … If you don’t want to eat lunch with somebody, don’t do a deal with them. Because if you’re not comfortable with these people, there’s no way your clients are ever gonna be.
Then there’s culture, and culture could be many different things. It could be dress code. It could be technology. It could be anything. So your cultures have to sort of mesh.
There’s continuity. Continuity. How long have their clients been clients? How long have your partners been partners? Do you have a high turnover in your firm?
And the last is capacity. Do they have the space and the room to take you on? One of the key questions is, do they have the financial resources to take you on?
We’re not going to take a $500,000 firm and show them a $2 million client, because the $2 million client is gonna start worrying about buyouts and payouts. They’re not going to make them. So we ensure that their capacity financially is ready for this. There are many, many firms who are, I hate to use the term, serial acquirers, who are very experienced in this. They’ll take on some debt just to service acquisitions.
So there’s no blanket answer to that. You’ve got to take it on a case by case basis. Often times firms will take on some debt to fund future acquisitions. There’s several top 100 clients we work with now that use such a strategy.
Speaker 1: Yeah, and it’s certainly a process. There’s a lot of context, right? Because if you’re an eight person firm, and you’re looking at acquiring or buying out a single person firm, and it’s really the client list that’s your driver for growth, or it’s one partner that’s a part timer. I imagine there’s a lot of conversations that go on that’s very contextual, whether how much cash is up front versus back loaded, based on client retention. That helps you de-risk maybe the cash up front. I think a lot of these scenarios can be thought through on a case by case basis. Is that right?
Speaker 2: Yeah, that’s fairly accurate. As far as the client retention, we always like to build in a two-year client retention period. That seems to be sort of the high water mark. If you’re gonna lose your clients, you want to lose them the first year. Once a retiring partner goes out, his buyout would be affected, obviously. Say he’s got a two-year client retention period, and then the third year, 20 percent of his clients leave, that’s gonna affect his buyout. So you want to shake the tree real hard the first year, because if you’re gonna lose any clients, you want to lose them then, and not when it affects your buyout.

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