Acquisition Growth: Factors to Consider for CPAs

Changing technology, talent shortages, high interest rates, and a potential recession have many CPA owners questioning if they should pursue acquisition. However, acquisition can solve for several of these concerns and help CPAs ride the waves of turbulence.

→ This article is an excerpt from The Bridge^®

For example, many CPAs acquire other CPAs for the sole purpose of adding their employees to the rooster. Or, another CPA may have mastered a new technology and through acquisition the acquirer will be better able to compete in the changing technological landscape. Even though interest rates are high, the right acquisition opportunity will boost revenue and increase economies of scale, allowing for more buoyance in turbulent times. Consider these factors as you continue to operate and decide the best growth opportunities for your practice.

Find the right acquisition growth opportunity

If your goal is acquiring another CPA or its client base, finding the right opportunity that fits your needs is critical to achieving expected results. Before your search begins, give some thought to what would constitute an ideal acquisition.

• Would it be an CPA in your current market or elsewhere?
• How large a company do you want to acquire, both in terms of revenue and staffing?
• Would you like the seller to stay on your payroll as an advisor or consultant?
• Do you prefer a profitable company that’s generating substantial revenue, or are you willing to pay less for a struggling operation that needs better management and offers synergies to save on overhead expenses?

Seek expertise

Successful CPAs know how to tap into knowledge and advice from various experts. This is especially important when it comes to acquisitions. Build a team of external experts who are experienced in the acquisitions and keep them involved throughout the entire process. They will provide additional viewpoints and identify issues you may not have considered.

Be sure to do your homework before retaining a professional or signing a contract for services and, again, consider seeking referrals from colleagues who have used outside advisors in their own acquisitions.

Whether you are considering debt or capital to fund your acquisition, find a trustworthy partner to secure your acquisition funding. Your relationship will continue beyond the deal’s closing, and a long-term relationship may form.

Perform due diligence

If there’s a single secret to a successful acquisition, it’s due diligence. While many buyers find the process long and tedious, the more you know about the practice you plan to acquire, the better you’ll be able to integrate it into your own company. Failing to perform adequate due diligence is a key reason many acquisitions fail.

To protect your financial interests and professional reputation, answer these questions:

1. 1. How do they do business?
      Few owners will volunteer every bit of information you need, especially the negative aspects. Check business references, investigate regulatory agency reporting, and perform online research to turn up any irregularities.
   2. Why are they selling?
      There are many legitimate reasons for putting a practice on the market, such as retirement or succession planning. Still, some sellers may be trying to evade financial or legal problems. Make sure those problems don’t become yours.
   3. Who owns the relationships?
      Find out which employees clients value most. If clients are fiercely loyal to a particular employee, do what you can to keep that person on board. Ensure that appropriate non-solicit and non-compete agreements are in place for key employees. If a key person leaves, make sure you can find a suitable replacement.
   4. Are client relationships healthy?
      How long have clients been with the practice? Consider the breakdown of the client base, average account size, and similar factors. If your acquisition does not include an earn-out provision with clawbacks, make sure that what the seller represents as revenue is accurate. As you review clients, estimate how likely they will continue as clients.
   5. How are the numbers?
      Don’t settle for pro forma financials. Have your accountant compare actual tax returns with management fees, compute ratios and margins, and examine the level of non-operating expenses. Watch for nonrecurring items that might artificially inflate income level.
   6. Can they solicit clients or compete?
      Have your attorney ensure that your purchase agreement includes ironclad non-solicit and non-compete agreements for the owners who might be tempted to take clients to another company or set up a new one.
   7. Are you compatible?
      Don’t neglect the intangible aspects of the transaction. Do you do business in ways that are similar to the current owner? Do you have a similar client service philosophy? Since the answers are seldom quantifiable, you’ll have to rely on observations as well as your gut instincts.
      
      

Find the value

Finally, don’t allow your emotions drive the process. The seller is excited at the prospect of a large influx of cash, while you’re excited about the opportunity to grow.

An accurate valuation is critical. Finding this involves both some art and some science. Several formal models are in wide use, so it becomes a matter of choosing the one that’s right for you. That choice and the number it ultimately provides are subjective but will provide a crucial stepping stone in your decision whether or not to acquire.

Using acquisition as a growth strategy can be both exhilarating and daunting. Acquiring, however, is a great way to take your CPA to the next level.