Tax Practices for Sale Observations

As I’ve been looking around at tax practices for sale, a couple observations:

It seems like many of the listings are around 30% to 35% cash flow to the owner. For example, I just looked at a listing for $390,000 revenue with 33% cash flow to the owner. That seems like a lot of work for not much reward. Many of the $150,000 to $200,000 practices seem to fall around here as well. That got me thinking, why are the margins so low - is it a pricing issue? Going after a too many individual returns? Or, maybe the owners are largely absentee? The latter sounds better, but I’m not convinced that’s the case.

Other observation - it seems like the bigger firms are usually under 60% tax prep, where it’s usually a bigger percentage of the smaller firms. Not sure what this means except monthly reoccurring income probably helps to staff and scale.

My goal is to double to $500,000 in revenue with at least a 60% margin. It seems like it should be doable with my assistant and a full time accountant later. But trying to learn any lessons by looking at the practices for sale has been somewhat discouraging.

Without additional information as to payroll, marketing expenses it is difficult to judge, but I will agree that on paper a 30% net cash flow to the owner seems low.

As you all know, payroll is the most expensive expense item, so small shops with a 1 or 2 person crew will have a higher margin. Then there are shops that believe in high volume, low cost simple returns. I knew a fellow that was charging on the average $100 for a 1040 form and was doing over 500 returns per season.

30 to 35% sound right to me. Historical rule of thumb for professional businesses was 1/3 wages, 1/3 oveheads, 1/3 profit for owner.

30 to 35% sound right to me. Historical rule of thumb for professional businesses was 1/3 wages, 1/3 oveheads, 1/3 profit for owner.

If it’s a one person shop, that would be a 67% margin. That seems more what I would expect.

A sole prop practice with revenues under $200,000 should show earnings available to owner of 50-65%. But I would not focus on their P&L, but rather the revenue and quality of billings. Their P&L is totally meaningless once you absorb their revenue into your practice. They may rely heavily on staff when you don't. Or they may be overpaying for rent and technology. You really need to do a proforma and show what the added revenue looks like if you were to absorb it into your practice. The only important factors are quality of revenue (average fees, client demographics, etc), and you cannot judge that from their P&L.

30 to 35% sound right to me. Historical rule of thumb for professional businesses was 1/3 wages, 1/3 oveheads, 1/3 profit for owner.

Sounds LOW to me. We do about 400K and I have never made less than 200K.

I just sold about 50K of my book to a partnership that just started and grosses 300K. 2 CPA's. They tell me they barely have enough time for new business. When I told them that myself and assistant do 400K and NEVER work Saturdays past 1pm and leave on Fridays at 12pm May 1 to 12/31, they were shocked.

Point being... depends on technology, experience , quality of clients etc but less than 50 percent , in my mind is simply a poorly run practice from a management standpoint.

On a related note, where do you guys come across the practices for sale? All I find in my area are listings with brokers, and I'd rather not deal with that.

Just curious, how much does H&R and Jackson Hewitt pay for tax practices. I would like to know because if I make an offer on a retiring CPA or EA's practice, I wouldn't want to insult them and come in under what those two would offer.

I've purchased 2 of my last 3 practices by sending out a letter to local tax professionals asking if they were looking to sell. I sent one letter in late-April/early-May and another in August. I had a good response and found very good quality practices.

On a related note, where do you guys come across the practices for sale? All I find in my area are listings with brokers, and I'd rather not deal with that.

I'm pretty much in agreement with smtcpa. A firm with <$200k revenues should generally net more than 50% to owner -- although at certain points the growth will have step costs which drops profitability (i.e. moving out of home to a separate office, hiring an assistant or another accountant, etc).

MWEA, make sure you look at the pricing of each individual service of the firms you're looking at. In my area, tax prep is decently priced but outsourced bookkeeping is only billed in the neighborhood of $40-50/hr, which is a lot of effort for next to nothing in return.

On a related note, where do you guys come across the practices for sale? All I find in my area are listings with brokers, and I'd rather not deal with that.

I'd network and put the word out that you're interested in growing by acquisition. Tell people your criteria. Someone may "find" you eventually. A lot of older CPAs are out there without a good exit strategy...

I am signed up for local alerts through http://www.accountingpracticesales.com/ to keep an eye on things. But...that site is essentially a middle man so maybe not what you're looking for.

I contacted APS and they sent me a buyer's packet ----- yeesh. It includes a couple articles that are a strike against them in my mind. They want 10% of the closing price. They push buyers and sellers to do the sale all at once, no spreading it out to account for client retention/attrition (20% over 5 years isn't 100%, let's do it now!), and they include a letter of intent that reads like a pseudocontract. The LOI includes a clause asking the owner to only be involved for two weeks after closing.

Their whole narrative is, we found you a good deal, take it now and walk away. I understand it's in their best interest to do so, collect their fee and free up their schedule. It just feels... icky.

Go to a lot of Tax seminars in your area and sit next to all the CPAs that look very old !

I'm pretty much in agreement with smtcpa. A firm with <$200k revenues should generally net more than 50% to owner -- although at certain points the growth will have step costs which drops profitability (i.e. moving out of home to a separate office, hiring an assistant or another accountant, etc).

MWEA, make sure you look at the pricing of each individual service of the firms you're looking at. In my area, tax prep is decently priced but outsourced bookkeeping is only billed in the neighborhood of $40-50/hr, which is a lot of effort for next to nothing in return.

A lot of good points from everyone who responded. I also like the post to proactively sending letters to other practices to search for opportunities.