Is Buying an Accounting Practice Right for You? 8 Questions to Consider

Purchasing an accounting firm is a monumental decision, filled with potential risks and rewards — it may not be the right move for everyone. But if you have the industry experience, the leadership ability, and the financial acumen, purchasing an accounting practice may be the best professional move you’ll ever make.
 
The information in this article (and more) can be found in our eBook about buying a firm. Download the free eBook today to see more information.
 

Questions to consider about buying an accounting firm

Below are eight questions to consider to help you better understand whether purchasing an accounting firm is the best choice for you. Your answers to these questions will give you more insight into the financial aspects and purchasing process that you would encounter when buying a practice.

What should you consider and look for when buying an accounting practice?

There are several factors to consider when looking for an accounting practice to purchase. It’s important to get a 360-degree view of the targeted firm in order to make an informed decision. Here are some factors to review:

• Client Base: Review client demographics, concentration risks, and retention rates.

• Financial Health: Analyze historical financial statements and revenue trends.

• Staff: Evaluate qualifications, retention rates, and staff morale.

• Reputation: Check for any legal or ethical issues the firm may have faced.

• ​Technology: Assess the modernity of the software and hardware in use.

• Transition Support: Determine if the seller is willing to assist post-sale to ensure a smooth transition for staff and clients.

• Cultural Fit: Ascertain if the firm's values and work style align with yours.

• Pricing and Terms: Ensure the valuation is reasonable and terms are clear.

• Growth Potential: Gauge future growth prospects and market position.
   

What are the benefits and disadvantages of owning an accounting practice?

While owning a practice can be lucrative and empowering, it comes with its challenges. Let’s review the pros and cons to help you determine if it’s the right choice for you.
 

How much does an accounting practice cost to buy?

The cost to buy an accounting practice varies based on several factors, including its location, client base, revenue, reputation, and the services offered. An accounting practice is often priced at a multiple of its annual gross revenues. This multiple can range from 0.5 to 1.5 times the revenue, depending on the market demand and the specifics of the firm.
 
For example, a firm generating $500,000 in annual revenue could potentially sell for $250,000 to $750,000. Other factors, like the firm's growth rate, lease terms, and client retention rates, can also influence the price. If you’re looking to buy a firm, it's important to conduct thorough due diligence, including reviewing the firm’s financial statements, to determine a purchase price equitable for both parties.
 

Is buying a CPA firm a good investment?

Buying a CPA firm can be a good investment for those with industry experience and business acumen. Established CPA firms offer a steady client base, recurring revenue, and potential for growth. However, like all investments, success depends on factors such as purchase price, the firm's reputation, staffing, client retention, and the new owner's ability to manage and grow the business. If done well, purchasing an accounting firm can be a highly profitable business move. Due diligence and understanding the firm's financials and operations are crucial before making a decision.
 

What is the due diligence process when buying an accounting practice?

Due diligence is a thorough investigation of the CPA firm you’re considering buying. This investigation is done to help you determine the strengths, potential risks, and overall value of the firm. Here are some areas for you to review during the due diligence process:
 

• Client details: Gauge the diversity, responsiveness, and loyalty of all current clients.

• Quality control: Read peer review reports, quality-control manuals, written policies, and more.

• Engagement, acceptance, and continuance policies: Assess the policies and where additional risk management may be needed.

• Information technology (IT): Review the firm’s data security, equipment inventory and more.

• Financial statements: Inspect the financial documentation, billing practices, and areas where rates could be increased.

• Personnel: Confirm the licensing and designations of the staff, look into any non-compete agreements, and determine whether there are any outstanding HR complaints.

• Culture: Review the staff diversity, assess the relationship between partners and non-partners, and check the office amenities.

• Insurance coverages: Once you have identified the target firm’s level of risk, it will help you decide if they have adequate insurance coverage, or if more is needed. Depending on the circumstances, it may be worth requiring the target firm to add an Extended Claim Reporting Period (ECRP) endorsement to any and all coverage it has (and where ECRP is an option) if there is the potential for exposure after the purchase.

 
Download our “Buying a Firm” eBook for a due diligence checklist.
 

How profitable are small CPA firms?

Small CPA firms can be quite profitable, especially if they have a loyal client base and efficient operations. Typically, profitability depends on factors such as client diversity, service offerings, geographic location, overhead costs, and billing rates. Small CPA firms may be able to enjoy profit margins ranging from 10% to 30%, though this can vary widely. Firms that specialize in niche markets or services often command higher fees and can achieve even greater profitability. However, it's essential to note that, like any business, the success and profitability of a small CPA firm requires sound management, adaptability, and a focus on client satisfaction.
 

How do you value a CPA firm for purchase?

Before you accept a seller’s price and purchase a firm, you have to first assess the firm’s worth on your own. That assessment may include everything from understanding the revenue multiples and profit margin to reviewing the quality of the staff and existing client base.

Ultimately, the value of an accounting practice is weighing the gathered information. If a firm has strong current financials, but if it isn’t a cultural fit or has a weak growth trend, that specific firm may not be your best choice. It’s going to be your firm, so determine what’s important to you before making any decision.
 

What questions should you ask when buying an accounting practice?

When you’re buying a practice, it’s important to get a feel for the firm’s personality and individual needs. That can be a difficult task if you only view the firm in terms of numbers and data. These are some questions to consider to help you dive a little deeper:
 

• Will your existing staff need to learn about a new area of practice in order to manage the target firm's specialties?

• Do you have the appropriate level of staff to manage the target firm?

• If purchasing an audit practice, are there any independence, conflicts of interest or non-compete issues?

• If the target firm operates in high-risk practice areas, do the benefits of continuing the specialties outweigh the risks?
   

Ready for a deeper dive?

Purchasing an accounting practice is no simple feat, but if you're serious about buying a firm, consider using our eBook as a resource. Packed with actionable insights and guidance, it's designed to help you reduce the risks associated with purchasing your own accounting firm.
 
Download the eBook now to unlock comprehensive insights on purchasing an accounting firm!