Buying an Accounting Firm or CPA Practice with an SBA Loan

What makes accounting practices different

An accounting or tax practice has recurring clients, low capital needs and, often, an owner approaching retirement. Those traits make practices popular with buyers, from CPAs going out on their own to firms buying a neighbor. The challenges are specific: clients follow people, revenue is bunched into tax season, ownership is regulated, and the industry’s customary pricing doesn’t fit SBA rules without adjustment.

For the general mechanics of an acquisition loan, see buying a business with an SBA loan.

Retention-based pricing and SBA rules

Many practice sales are priced as a multiple of revenue, with part of the price paid over time based on how much of the client base stays. That’s an earnout, in effect: a contingent payment to the seller that depends on future performance. Under the current SBA rulebook, seller earnouts are prohibited. What’s allowed is the reverse: a buyer rebate, where the seller refunds part of the price if performance falls short. Any rebate the buyer receives must be applied to pay down the principal of the SBA loan that financed the purchase.

In practical terms:

• Not allowed: “The buyer pays an additional amount each year for three years equal to a percentage of collections from transferred clients.”
• Can work: A fixed price, paid at closing with the SBA loan, your equity and possibly a seller note, with a clawback under which the seller refunds part of the price if retention falls below an agreed level.

A seller note can still be part of the deal. If it’s on full standby, it may count toward your equity within limits; if it pays, its payments are part of the debt the cash flow must cover. See equity injection and seller notes and the earnout entry. Have a deal attorney draft the clawback; the wording matters to the lender.

What lenders look at

Client retention and concentration. How many clients, how long they’ve stayed, and what share of revenue the largest ones represent. A practice where a few business clients drive much of the revenue carries concentration risk; lenders look at it closely.

Revenue mix. Individual tax returns, business returns, monthly bookkeeping and payroll, audit and attest work, and advisory work each behave differently. Recurring monthly engagements are steadier than once-a-year returns.

Realization and collections. Billed versus collected, and how old the receivables are.

Who does the work. If the seller personally handles the largest relationships, the lender will want to know how they’ll move to you. If key staff are leaving, that matters too.

Software and capacity. Practice-management and tax software, and whether the staff can handle the season without the seller.

The lender’s own valuation and, on larger deals, a quality-of-earnings report will examine revenue quality and client concentration.

Tax season and cash flow

A traditional tax practice may collect a large share of its revenue in a few months and pay staff all year. The lender’s analysis includes working-capital adequacy over the coming year. Practical points:

• Closing date. Closing just after tax season means you inherit the slow months first. Plan a reserve for them.
• Work in progress and receivables. Agree in the purchase agreement who gets fees for work done before closing and collected after.
• Line of credit. A small line can carry the firm through the slow months. See working capital in a business acquisition.

Ownership and licensing

State boards of accountancy commonly limit who may own a firm that practices as a CPA firm, often requiring a majority of ownership by licensed CPAs. Rules vary by state, and some practices, such as bookkeeping or tax preparation that doesn’t hold itself out as a CPA firm, may be treated differently. Confirm your structure with counsel before the letter of intent.

The seller’s role after closing

Clients often stay because the seller introduces them to the buyer personally. Under SBA rules, in a full purchase the seller can’t remain as an owner or employee, but the business can engage the seller as a consultant for up to 24 months in total. Plan the introductions around one full tax season if you can. See the seller transition period.

Before the letter of intent

1. What’s the retention history, and how concentrated is revenue?
2. How will the price adjust if clients leave, and is that structured as a buyer rebate rather than an earnout?
3. Who owns the firm after closing, and does that meet your state’s rules?
4. When will you close relative to tax season, and how will you fund the slow months?
5. Which staff are staying?

Compare an SBA loan with a conventional practice loan or seller financing in SBA vs. conventional vs. seller financing, and test your numbers in the acquisition calculator. If you’re buying a practice, tell us about it and we’ll give you an honest read on the structure.