Wish to Purchase Small Tax Practice

For reference, I purchased a $200k practice for .75, payable with no interest over 5 years. There was no retention provision which worried me but has turned out to be a non-factor. We've been growing over 10% per year; I've basically stopped marketing and networking to avoid growing too fast.

In 2018, two CPAs in my region just retired; they did not sell or anything. I learned when I picked up several of their clients. If I had known in advance I would have offered at least .25 and hired a tax manager for each. Each had been in business over 20 years.

Many years ago I would attend local CPE seminars and sit next to the oldest CPA in the room. I made some good contacts concerning purchasing practices.

To CornerstoneCPA's point I was approached by a colleague recently wanting to sell her practice. Annual billings in 2018 were ~$80k. From her client list printout I could instantly see she wasn't charging enough. She wanted $15k, the remainder over 5 years. No skin in the game she just sends a letter of introduction with my information and walks away. I said no way. I offered her a % of anyone who stays over a period of time, with the % based on the fee she had charged - not any increases from the point she hands me the client list.
She said a broker offered her $90k. Later, after consulting with the broker, she told me they told her she needed to increase her client base, yet she wants to downsize and get out of the business...

I hate to say it but most of these brokers will paint a nice picture with generous upfront payment to sign you up for an exclusive contract and then they start squeezing you. A friend of mine made that mistake and took her over a year to get out of it. Talk is cheap.

Atsman, my point exactly. Also, I noticed I forgot to mention she wanted $80k...

To CornerstoneCPA's point I was approached by a colleague recently wanting to sell her practice. Annual billings in 2018 were ~$80k. From her client list printout I could instantly see she wasn't charging enough.

Wouldn't that be a good situation for the buyer? She not charging enough means that there will be room for the one who takes over to increase the fee up to the market rate. Theorefore, you would pay below market rate for the practice.

It would appear that way on the surface. However, she hasn't put any time or effort into increasing the fees and is still making money without putting forth any effort. In addition, there is always some attrition' not everyone stays regardless of the fees. Also, fees for some clients were so low it really wouldn't even be worthwhile for me to keep them on.

Unless health issues are present, the seller needs to stay involved for at least 6 months (ideally a year) to assist with client transition. Compensation during that time would become a component of sale agreement.

Many years ago I would attend local CPE seminars and sit next to the oldest CPA in the room. I made some good contacts concerning purchasing practices.

Ha, interesting tactic. Many of our locally owned firms are owned by CPAs nearing retirement age or death's door. My area is going to have a sudden surge of firms closing, selling, or merging within the next 5 years...my goal is to be in a prime position to acquire several of them, convert to my virtual services model, and eliminate the physical offices. There are only a couple of local or regional firms that have the means to acquire these firms, but they will not be able to take on all of them for a number of reasons, client attrition being one huge factor if acquired by the larger firms...or, those firms simply have lousy reputations.

in response to philly...clever idea...but often a lot of the clients are around the same age as the practitioner............"Many years ago I would attend local CPE seminars and sit next to the oldest CPA in the room. I made some good contacts concerning purchasing practices." Question: if i did this, am i paying for clients that won't be in business too much longer...or clients that are significantly older than me? Maybe that's a good variable to negotiate price on.

Question: if i did this, am i paying for clients that won't be in business too much longer...or clients that are significantly older than me? Maybe that's a good variable to negotiate price on.

My experience with many older accountants/tax prep firms operators is that they are trying to get into a semi-retirement mode and they want to get rid of their "challenging" clients and basically deal with the easy ones. This is a good negotiation strategy if you can convince them how your service will lessen their "tensions" and at the same time you give them a fair price for their client base.

Previously I have acquired clients with complicated returns from a near retiring accountant on a percentage of fee split basis. The key here is the communication from the seller to his client. Why should they move! How much you split is based on the complexity of the return. I have done in the range of 10% to 50% for a limited years based on retention.

One year I acquired 10 clients with Sch C and Sch E (multiple rentals). If I think about those clients, I lost 2 from that lot after a year or two so 80% retention is still ok in my book.

I'm not saying don't buy a practice, but if you can't find the right deal, pay for blogging and advertising to build your own client base. Be good to your clients and $60,000 invested over 3 years will get you $240K gross and plan on a 50% profit margin. Then you can still grow form there.

Hi all, really enjoyed reading your posts. I was a partner in a small firm (NYC). Growing quickly etc in my mid 30’s. Once it became apparent that the price to buy the firm out was astronomical I left the firm quickly (after putting in 12 years). I joined another firm and only took 130k worth of annual business with me. I’m a few months away from finishing the first year but itching to go on my own. The 130k quickly grew to over $200k and though my salary is above that I’d like to take a shot at building my own firm. If anyone has an extra office to rent out within their space please let me know. Also exploring the idea of buying a small practice but the fees charged cannot be based on 1980’s rates. I’m very reasonable and willing to take on risk but some of the 65 year old + folks I’ve dealt with that are looking to slow down for some reason think that they are sitting on gold mines.

I have a feeling I may be able to build from scratch (multiple new clients came from accountants that died or retired without warning). This is really a shame as I know there must be guys and gals out there looking to partner up with someone young, hardworking, smart and successful but can’t find that person.

I must agree with comments about brokers. They have great connections but they often screw things up. Happy upcoming Oct 15 deadline to all!