Four Ways to Structure a CPA Firm Sale

Source: AICPA CPA Insider

1. Based on collections—example: up-front payment of 20 percent of the initially set value, then 20 percent of collections a year for four years.
   1. Seller can get more than the initial value if fees grow.
   2. All risk of retention is on the seller.
   3. Must clearly set forth how new clients are factored in.
   4. How collections are applied must also be agreed on.
2. Based on a “look-back” period—example: the initial price is equal to one year’s expected collections. That price is adjusted after one year for any variations from expected collections. If the initial price is $325,000 for a firm that generates $300,000 a year, but actual collections turn out to be $275,000, the price is adjusted to $300,000. In one alternative, the adjustment may be 50 percent of the variation in collections. Sometimes there is no adjustment if the variation is less than 10 percent.
   1. Sellers may prefer this to the collections method because risk is diminished. So long as the clients give the buyer a chance to prove itself, the seller gets paid.
   2. There are many possible variations for this method.
3. Cash—the seller takes no risk that the buyer will not retain clients.
   1. Allows the seller to retire more quickly.
   2. The price is likely to be less than if based on collections or a look-back period.
   3. Typically there is lender financing of the buyer.
4. Fixed price with a payout—seller takes no risk on the buyer’s abilities.
   1. Interest on the unpaid debt may be included.
   2. Buyers don’t need lender financing.
   3. Sellers worry about collecting their funds. Therefore, they may want to stay involved in the firm for some time.

The first method above is so popular, many accountants think it is the only way. But all these methods are used.

These different methods affect the price of the practice. Sellers will get the best price and terms if they seek a large number of buyers.

From AICPA CPA Insider, July 12, 2007, www.cpa2biz.com. For the complete article, click here.