Four Ways to Sell a CPA Firm
Source: AICPA CPA Insider
The following includes excerpts, reproduced with permission, from an article contributed by Accounting Practice Sales.
Historically, practices have been sold with a seller-financing arrangement, usually involving some type of client retention guarantee by the seller. But practices sell today in different ways and on different terms. There are four basic ways firms are sold.
With seller guarantees:
1. Collection Pricing. A seller-financed transaction in which the seller receives payments based on what the buyer collects (or, perhaps, bills) over a period of time. Buyers like it because it gives them easy cash-flow payments and shifts most of the risk of client retention to the seller. Sellers don't like assuming the risk in a manner that requires them to guarantee the buyer's work and abilities down the road.
2. Look-Back Pricing. The buyer looks back after a period of time (typically, one year) at how much has been collected (or, perhaps, billed) and the total sales price is then adjusted up or down. This pricing is similar to collection pricing in that seller guarantees are involved, but it can be used with both cash and seller financing. It's not nearly as common as collection pricing, but sellers are more comfortable because they're at risk for a shorter period of time.
Without seller guarantees:
3. Cash Pricing. The seller receives the full price at closing. The buyer finances the purchase with personal funds or, more often, with a loan. A loan creates a win-win situation because the seller receives cash and the buyer can often obtain favorable payout terms. This option has become more common, especially with solid firms in desirable locations.
4. Fixed Seller-Financed Pricing. This includes any fixed price, without a client retention guarantee, paid to the seller over a period of time, with or without interest. This method is often misunderstood because “seller financing” is often used to describe methods 1 and 2 above. Sellers prefer fixed financing over seller guarantees, but they still worry about collecting. Sufficient down payments, good credit on the part of the buyers, and strong buyer experience and credentials can alleviate their concerns.
For the complete article, read “Show Me the Money: How CPA Firms Are Sold.”
From AICPA CPA Insider, October 24, 2011, http://www.CPA2biz.com.