With all the challenges facing our profession today — burnout, fee compression, talent shortage, boomer partners retiring, etc. — organic growth has never been more challenging. On the flip side, it’s never been easier to acquire complementary firms and fold them into your practice if you take the right approach.
Michael Ly, is the founder and CEO of Reconciled, a four year-old accounting and tax firm that has grown to 55 employees in 15 states and three countries. After integrating three successful acquisitions in just two years, he has learned many valuable lessons along the way.
Ly mentioned on an episode of my podcast that there are more firms than ever looking to sell. He also said there are a wide variety of financing options available for accountants, CPAs and fellow entrepreneurs who are interested in purchasing a firm. Just don’t underestimate the human size of the equation, he advises, and don’t rush your newly inherited staff through the onboarding process.
According to Ly, one of the things that stops most firms from growing is the owners are reluctant to expand past the number of people they feel comfortable managing. He also said many accountants have difficulty selling to scale and then creating a systemized process for bringing those customers in — and finding the talent to serve them. Ly, who has never been afraid to think big, wondered if it wouldn’t be easier and more efficient to acquire built in staff and processes at complementary firms, rather than hiring them and training them one at a time — and hoping they will stay.
Enter the acquisition search.
But how exactly does one go about buying an accounting firm?
As Mahatma Gandhi famously said: “If you don’t ask, you don’t get it.”
During the pandemic, Ly started reaching out to bankers who specialize in accounting firm financing. He talked to brokers who represented firms either for sale or who would represent them as buying brokers. And then he talked to some of the investment groups that approached him about selling when he was in the early years of building Reconciled. He also partnered with a buying broker that scouted and recruited potential acquisition candidates that fit his needs.
“Most accounting firms have a broker representing them for sale,” he recalled. “My approach was a little unique in that I wanted to find a dedicated broker to represent us for purchases on a regular basis. So, I hired a gentleman with corporate development experience that also had experience representing larger accounting players.” As with commercial or residential real estate brokering, there are great buy-sell agents and there are bad ones. You have to vet them and check references. There’s really no handbook or guidebook to read. “There’s no class to take,” recounted Ly. “You literally learn by making mistakes and having failures in the whole process.”
By the same token, Ly strongly advises against being a do-it-yourselfer in the M&A process. “You can always represent yourself, but do you really want to wade through the unknown on your first deal without having professional representation on your side?” he asked. “Sure, you can have your longtime attorney represent you. But most attorneys have never represented or sold a business before, let alone an accounting business. That’s where having a broker that really understands the accounting space is super helpful.”
Criteria
In addition to meeting a minimum revenue and headcount threshold — $800,000 to $2.5 million in Ly’s case — you want to find firms with “sticky clients” who’ve been with the firm for five or 10 years, or even longer. As a rule of thumb, good accounting firms are generally selling for 80% to 120% of revenue or two to four times EBITDA. You also want firms in which the name of the enterprise isn’t so closely aligned with the name of the owner. That’s because the owner will need to be willing to step away after a short transition process, which in Ly’s case is six to 12 months.
Technology transition
Ly said most of the firms he looks at are still using Microsoft Outlook and an internal network server-based IT system that’s housed at the accounting firm’s office. Typically, they are still on QuickBooks desktop or QuickBooks Enterprise hosted. Upgrading the acquired firm’s tech stack is one of the first orders of business. “We want to do a conversion to QuickBooks Online or Xero or some cloud-based product as fast as possible,” said Ly. “So, we take six to 12 months post-acquisition to do that transition. I’ve learned the hard way you can’t rush this process. Part of [the] seller’s compensation [should] be tied to ensuring a smooth tech transition.”
How to finance acquisitions
Just like there are multiple ways to finance the purchase of a house, there are multiple ways to finance accounting firm acquisitions. Many are surprised to learn they can qualify for Small Business Administration financing through the SBA’s 7(a) loans at their local bank. You tell the bank the approximate size firm you want to buy and the type of firm you’re looking for. Based on those criteria, they’ll tell you how much you can qualify for, just like when you pre-qualify for a home mortgage.
Ly said the SBA makes the financing process simple for qualified buyers because it’s part of its mandate to encourage entrepreneurship and small business creation. “They’d rather see a business change hands than shut down. Shutting down means jobs are lost, tax revenues decline and communities are impacted,” he noted. “SBA loans step in to help banks take bets on acquisition financing that they necessarily wouldn’t take on their own. With a little work, you can find banks that specialize in accounting firms financing.”
You can borrow up to $5 million through the SBA program, and Ly said many brokers have relationships with banks that are willing to finance the deals they’re representing. “As a result of those relationships, that bank is able to move very fast,” he observed. “It’s like a real estate agent recommending a mortgage company to work with you. They can move very fast when they trust the broker and they trust the quality of the firm.
“If you need to borrow more than $5 million, you can also do a conventional commercial loan that’s outside of the SBA. However, you will need to put more money down when you do that process.
SBA loan down payments, rates and terms
According to Ly, there are some banks that will loan up to 100% with no money down, because if you own a firm, they actually count the equity toward the new firm you want to buy. And then they’re able to finance up to 90%, or sometimes even 100% of the rest. SBA loans are typically in the seven- to 10-year term variety with rates in the low single digits. “It’s some of the cheapest money you can get for business acquisition purposes,” Ly asserted.
It seems crazy that accounting firms are closing their doors because they can’t find a buyer. Government-backed financing is there. The talent is there. The clients are there. It seems like a pretty small risk to take if you are really committed to growing. Just make sure you have the right team advising you along the way.
