CPAs and lenders, a dynamic duo for better business

CPA firms and lenders are natural allies. Both use resources and expertise to help clients prosper. The true benefits of a strong partnership with a lender go beyond helping your CPA firm’s clients or providing referrals. A lender who understands your practice can expand your client capabilities through partnerships designed to support client business growth, succession planning, and merger and acquisition opportunities, when they arise. 

Below are several areas where lender-CPA coordination can benefit accountants and their clients.

Strategically planning ahead for tax changes

The 2017 Tax Cuts and Jobs Act that brought reduced taxes to corporations and individuals has entered its sunset phase, so businesses and personal taxpayers will be seeing higher tax bills now through at least 2025. Entities that took on debt when tax rates were lower may now find their cash flow strained by their greater tax liability. CPAs and lenders can work together to help clients restructure existing debt to accommodate these changes or plan for new debt with tighter cash flow considerations in mind. 

Advice and counsel related to loans

Signed by President Biden in August 2022, the Inflation Reduction Act includes a new 15% Alternative Minimum Tax on corporations with an average book revenue of $1 billion or more for each of the previous three years. Forbes estimates that 33 of the largest corporations in the U.S. will be subject to the new 15% AMT. Many companies on that list account for a significant portion of spending by businesses and individuals, including telecommunications giants T-Mobile, Verizon, and AT&T. Others include Amazon, FedEx and UPS, along with numerous energy suppliers. If these mega corporations pass on their increased tax costs in the form of higher prices, spending could fall, possibly triggering a recession. 

Businesses looking to finance expansion or a new project through debt may find that the higher prices passed through from major corporations will have a negative effect on cash flow, potentially limiting their ability to borrow. Accountants who have an existing relationship with a capital provider will understand that lender’s requirements and can advise their clients how to budget for and best prepare to qualify for loan approval. Lenders do not provide counsel related to forecasting and managing books. This is the role a CPA plays, and it’s a vital one during the loan process.

Team effort to benefit the customer

CPAs play a critical role in helping clients prepare their business to take on debt via a loan or to position themselves for M&A. Here’s where an established relationship between the lender and accountant can benefit all parties involved. 

Accounting professionals advise clients on budgeting and financial strategies to optimize debt financing. Capital providers look for at least three years of projections when evaluating a potential borrower, but not all businesses routinely have them. Businesses need complete and clean financial statements when applying for a loan. A borrower needs to be prepared for the effect on cash flow that the debt service will cause. 

Accountants who have an ongoing relationship with a lender know specific requirements to help borrowers navigate the application process smoothly by creating projections, preparing the required documentation in advance, and doing the necessary budgeting to make sure the borrower can handle the debt service. 

Foundation for succession planning and M&A strategies

Having an ongoing relationship with a lender also benefits accounting firms involved in their own succession planning or M&A deals. A conventional non-SBA lender who is experienced in the sale and purchase of accounting firms understands that the nature of cash flow and valuation in the industry is based on the book of business. They are more flexible than an SBA lender, allowing for more creative structuring of purchase arrangements, a benefit of growing importance in this time of increasing interest rates. Fixed and variable rates may be available, and a wide range of risk-spreading options can be set up including seller notes and earn-out provisions. 

In a recent webinar, our strategic markets vice president painted a great picture explaining there has been a reasonably “well-defined revenue multiple for determining what accounting firms sell for, but that’s changing with private equity money coming into the space.” He says three- to five-year earnouts have now become standard operating procedure in M&A deals in the accounting practice sector. For practices looking for acquisitions, having an established relationship with a lender makes it possible to respond quickly to opportunities when they arise.

Value of partnerships

Accounting firms and lenders have always been good sources for referrals to one another, but there are many more benefits of partnership, particularly to the mutual client. Call it a dynamic duo, with a CPA to provide strategic counsel, and a lender with access to capital creating a valuable asset for a business owner’s continued growth and long-term exit planning.