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Discussion:CPA firm buy-in practices

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Discussion Forum Index --> Business Growth Community --> CPA firm buy-in practices


Drawdy (talk|edits) said:

11 March 2008
I wanted to bounce this off some folks. I currently work for a sole proprietor with 5 CPAs and 4 other employees. We do accounting, auditing, tax, financial planning, etc. I am the #2 person in the firm and have undertaken a client develpoment role.

I have to pay for my own chamber of commerce, etc. dues AND any event like that I attend is not allowed to count toward my "firm" time. So, after spending my own time and money, let's say I bring in a $1,000 revenue/year client.

I would receive 10% of the revenue from that client for three years. This is a maximum of $300.

Meanwhile, my boss will receive the following: $1,000 * 50% (avg. profit margin for a well run CPA firm) = $1,500 less $300 paid to me = $1,200 (After year 3 this goes up since I no longer receive "commission")

That seems ok to me, but he is currently 62 and will be retiring sooner than later. So when he sells the firm he expects 130% of revenues, which he says is the current market rate. When I asked he said I would receive no discounts for revenues attributable to clients I have brought in. So, I would need to pay in $1,300 for the $1,000 revenue client I spent my own time and money to bring in.

When this is netted, I will have paid $1,300 less the $300 I received in "commission" for a total of $1,000 OUT OF MY POCKET and he will have received $1,200 (3 years of profit) + $1,300 (my buy in) for a total of $2,500.

So, does it seem fair/equitble for me to spend my time (literally my time) and money to bring in clients for which I would have to pay him their revenue while he keeps, at a minimum, 2.5 times their revenue?

Phil Moody (talk|edits) said:

11 March 2008
Its like anything in life, no one is holding a stapler to your head.

You do not have to purchase anything.

Go out on your own now.

Now, the tough part. You won't..why...because of risk of failure. You are are not paying him for clients, you are paying him for the risks he took in life to get where he is, which will now reduce your risks.

Remember all those clients you purchase, are not bound by your contract with him. They can leave the day after your contract.

Drawdy (talk|edits) said:

11 March 2008
"Go out on your own now.

Now, the tough part. You won't..why...because of risk of failure."

Actually I can not make a definitive comment on this and my plans because my real name is on this web site and I do not know who may read it. :-)

Failure does not intimidate me, I assure you. I have been sure to diversify my income stram already through teaching online university courses at night. Also, my wife make a good salary so the financial risk would be minimal.

I just wanted to get some insight as to whether this was the normal "deal" others get when buying in or if it's economically unviable. I like our firm, clients, and the people here but am not going to go into a bad deal just to stay.

Phil Moody (talk|edits) said:

11 March 2008
Great.

In our area, practices sell from anywhere from 90% to 250% of gross billings. It all depends upon the make up of the clients; ie ; tax/auditing/reviews/etc. Most sellers will carry a majority of the sales price at a less than market interest rate, typically 10 years. Also, the buyers typically will get to review those clients retained after a one to two year period, and adjust for clients that left the firm. Also a major non-compete from the sellers.

Those getting the higher percentage of billings usually have high billable rates, with 95% to 110% (and higher) realization rates.

Kevinh5 (talk|edits) said:

11 March 2008
John, I sold my practice on Bells Ferry Rd (just up the street from you) a few years ago for 1.25 INCLUDING assets. So it was more like 1.00 + FMV of assets.

Kevinh5 (talk|edits) said:

11 March 2008
John, give Leon Faris at PAS (www.cpasales.com) a call tomorrow. Tell him Kevin Huston sent you.

Drawdy (talk|edits) said:

5 April 2008
Well, I've done it. I left my former firm and have opened my own practice. It's very exciting so far! I guess it won't be long until that excitement wears off, huh?

DZCPA (talk|edits) said:

5 April 2008
You left the firm in April??? Nice job. I'm sure you will get lots of referrals now from them....not.

Kokomo (talk|edits) said:

8 April 2008
For what it's worth what your former employer asked for does not look unreasonable. Out here in CA, the sales price is about 1.2-1.3 of annual 1st year revenue for a business with about 50% net income compared to revenue.

Eastendcpa (talk|edits) said:

8 April 2008
I personally think that paying for your chamber dues and meetings that will benefit someone else is not very motivating. And neither is the commission max of $300. Might as well do it for yourself and stop being pimped out.

Kevinh5 (talk|edits) said:

11 April 2008
Drawdy, my old tax office on Bells Ferry Road is still for sale - prime location across from Towne Lake/Eagle Drive and in front of the new Super WalMart. Interested? It's only a few miles from where you are now, and people are used to a tax firm being there.

Jenine7 (talk|edits) said:

April 18, 2008
Myself and another CPA are debating on buying the firm we work for. One of the 2 partners is ready to retire in the next year or so. Or going out on our own. We are located in eastern Kentucky. Can anyone tell me if the average sales price for this area is similar to what was discussed for in CA?? Very interested in any info that can be provided. Thanks.

Mmshugart (talk|edits) said:

23 April 2008
I am new to this forum so let me start by saying thanks to anyone that can provide me with some advice. A local accountant from my home town has asked me to purchase his buisness. He wants 2x gross revenue, he is not a CPA but has a good deal of buisness. He agreed to stay on for awhile to adjust the clients to me. I came to work for him in February to see if it was something I would like to do. So I made it through tax season (not my first) and survived okay. He does not do audits since he is not a CPA. I have my CPA, but am lacking in experience. I am fine with personal tax and the bookkeeping side it is the partnership/Scorp/Ccorp/Estate tax that scares me. He has no other help. Oh also the sale only includes the clients not the building I would have to move it to a new location and pay rent. I would also have to pay him a salary to stay on which I am willing to do. My question is what is the going rate for a tax & bookkeeping practice and does anyone have any suggestions on clauses/negotiations I might add to benefit me? Thanks.

DZCPA (talk|edits) said:

23 April 2008
1 times gross is standard in the USA. You want a first year guarantee. Do not keep old owner. You want those "married" to him/her to leave in the first year. A covenant for 50+ miles and 5 years min.. Do not raise fees or change anything for the first year. These are a few of my experiences in purchasing 5 firms with 80% billling retention in the first year within the last 20 years.

Kokomo (talk|edits) said:

26 April 2008
I agree with DZ. I don't have much experience as he does in buying practices. I bought 2 practices in the last 2 years. When I bought my 1st practice I made a mistake of keeping the seller for the first year -- It's great for the seller but not for the buyer. This is because the client relationship did not transfer because the clients wanted to see the seller instead of me. When the seller left after the first year I lost about 10% of the clients. Fortunately, it was a small practice (~80K). When I bought the second practice the seller was not kept. Many clients (about 20%) left but the loss was borne by the seller because of the 1st year guarantee.

UTdave1 (talk|edits) said:

22 May 2008
I'm also considering buying into the local firm where I used to work. How would you approach the valuation on the buy-in versus the valuation on an outright purchase of a practice? I've read that often when partners retire the buyout is around 75-80% of their share of gross. The logic being that 1x gross is typically adjusted for lost clients and the amount is generally less than that once settled out. I don't want to screw the current owner (future partner) but I also don't want to pay more than I should. How have your firms determined buy-in for new partners? I'd ask at the current firm but I'd prefer them not to know anything about my plans. Any advice on structuring the deal? Should I push for him to carry a note or try to finance through a bank? I'd like to get him to carry at least part of a note that way if the firm fails for some reasona (unlikely but Anderson did) then I'm not on the hook for a loan to the bank w/o anything in return.

Bushmaster (talk|edits) said:

29 July 2008
Do 20% of 1 X gross for each year for 5 years and retention is measured yearly. That way, you can keep the current guy around for as long as you need him and then if the clients bolt when he does, it is STILL on him. Then, it will be in his/her best interest to make sure the clients stay put.

Drawdy (talk|edits) said:

20 June 2012
Funny...I just came across this in a Google search while looking for something else. I'mthinking about bringing in a partner with my firm and was searching for info on that.

Anyway, DZCPA, I had turned in my two week notice which encompassed April 15 but was not allowed to work it out as I was upfront about my intentions. Thus I was able t start my firm in April. I still get along fine with my former boss, however.

Fsteincpa (talk|edits) said:

20 June 2012
How close to Savannah?

one post removed (poster started a new discussion that duplicates this post)

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