Buying an Accounting Firm: Is It the Right Move?

When Buying a Firm Makes Sense, and When It Doesn't

Eric Rabinovich, a debt advisor at SBA Loan Lab who works with buyers of accounting and tax firms, starts every conversation about acquisitions with a caution. "It's not the right move for a lot of people just because others are doing it," he says. "It's about culture. It's about fit. It's about scale."

Before you go any further, ask yourself honestly whether you have the systems, the people, and the energy to absorb another firm's clients and team.

It's also fair to say that growth isn't required. "There's nothing wrong with reaching a certain cruising altitude and just being happy with that," Eric says. "I think that should be celebrated." Acquisition is a tool for owners who want to grow faster or differently, not a requirement for a successful firm.

Why Acquisition Speeds Up Growth

Organic growth takes time. Rachel Dillon, who leads Dillon Business Advisors (DBA) with Marcus Dillon, CPA, once asked a business development expert about the best growth options for accounting firms. His answer surprised her. Marketing plans, new hires, paid ads, and lead generation services all take about six months to show results, and closer to a year before they make a significant difference. If you want meaningful growth in less than a year, he told her, acquisition is the realistic path.

The industry data points the same direction. Marcus noted that firms on the IPA Top 500 list grew organically by about 8%, but growth jumped to more than 20% once mergers and acquisitions were included. Even the largest firms are using acquisitions to grow faster than organic growth allows.

Why the Timing Favors Buyers Looking for Smaller Firms

Many firm owners are reaching retirement age, and their firms have to go somewhere. In 2015, the AICPA estimated that about 75% of its members would be eligible to retire by 2020, and many of those owners are still working and still deciding what to do with their practices.

"One of the things I hate to see is an owner who doesn't know that he or she has an asset that is valuable," Eric says. Too often, those owners never plan a sale, close up shop, and hand their clients off to colleagues. For a buyer, especially one who already has cash flow, processes, and a team in place, stepping in to buy that firm can be a win for everyone involved, including the seller's clients and staff.

Two Common Reasons Firm Owners Buy

Buyers in the accounting space tend to fall into two groups.

The first is the individual buyer, often a senior manager at a larger firm who wants more control over their career. They usually look at firms in the $250,000 to $700,000 range, with the goal of replacing their salary and building flexibility. That's how DBA started. In 2011, at 28, Marcus wrote letters to retiring firm owners, found a $400,000 practice, and bought it with a bank loan, a seller note, and a 10% down payment. "We were really just looking to replace my income," Marcus says of that first deal, and that's still a common starting point for buyers today.

The second is the existing firm that has hit a revenue ceiling. For DBA, that ceiling was $3 million. The leadership team wanted to add director-level roles and give team members room to grow, but organic growth wasn't going to fund those positions on their preferred timeline, so acquisitions became the way to reach the next level. Plenty of firms find themselves in a similar spot at $2 million or $3 million, needing a Director of Tax or a Director of Accounting but unable to afford one without a pay cut for the owners.

What Today's Market Looks Like for Buyers

The process of buying a firm hasn't changed dramatically over the past 15 years, but the competition has. Eric describes the market for established firms as truly a seller's market, with more buyers than ever. Graduates of entrepreneurship-through-acquisition programs, investor-backed buyers, and what he calls "micro PE," smaller firms with an acquisition arm that steadily buys up $300,000 to $500,000 practices, are all looking at the same opportunities.

That doesn't mean a smaller, independent buyer can't compete. A firm that can give the seller a clean exit and a good home for their clients and team often has an edge over a buyer who requires the seller to stay on for years. But it does mean preparation matters more than ever, because the buyer who's ready to move usually wins.

How to Prepare to Buy an Accounting Firm in the Next One to Two Years

If you think an acquisition could be in your future, there's plenty you can do now to be ready when the right firm comes along.

• Talk to people who have bought a firm. Eric says owners are often surprised by how open other buyers are about their experience. Ask what they'd do differently and what they wish they'd known.
• Get your finances in order. Pay down debt where you can and hold off on large purchases that could affect your credit score. Lenders will review all of it when you formally apply
• Work backward from the down payment. Lenders typically look for about 10% equity, so a $5 million firm means solving for roughly $500,000, while a $500,000 firm means about $50,000. Knowing that number helps you rule out scenarios that aren't realistic yet.
• Talk to your bank early. Banks don't charge by the hour, so an early conversation is free education, and that banker may become a resource when you're ready to move.
• Get pre-qualified before you find the firm. A pre-qualification letter, a completed personal financial statement, and proof of funds help you stand out when a broker is fielding interest from dozens of buyers.
• Define what fits. Think about the services, client types, technology, and culture you're looking for, so you can move quickly on a good fit and walk away from one that isn't.

Get Help Deciding If an Acquisition Fits Your Firm

Deciding whether to buy a firm is a big call, and it's easier with people who've been through it. Collective by DBA's advisors have worked through acquisitions and divestitures from both sides, and they can help you weigh the fit, the numbers, and the timing for your firm.

Schedule a call with Rachel Dillon at Collective by DBA to talk through your plans. Or, if you'd rather start by learning alongside other firm owners who have acquired firms, explore Collective by DBA membership.