The market for the sale and acquisition of tax and accounting practices looks very strong this year. After a few subdued years due to the pandemic and series of tax filing deadline changes, the normalization back to how things were in 2019 and before across most the market seems to have normalized the acquisition market like what we experienced in 2012-2019.
This year we are in dialog with three distinct types of buyers. Each has unique strengths and capabilities. Some may work for one type of seller but not another. Here are the three types of buyers:
The Existing Practice Owner
The practitioner who already owns a practice in the vicinity of the seller remains the most common buyer in the market. The ability for the business operator to pick up instant revenue with all the knowledge of the clients that the seller possesses is irresistible to many.
The scales of economy and synergies typically enable this buyer to meet or exceed the seller’s discretionary earnings even after debt service is factored. This buyer typically has some cash reserves and should easily qualify to get the acquisition bank financed.
This is the ideal buyer for a seller who wishes to retire and exit the practice within months after selling or maybe through the end of the next busy season on a part-time basis.
The Entry Buyer
In our vernacular the term “entry buyer” refers to experienced tax and accounting practitioners who are looking to join the ranks of practice owners and start their ownership journey. They may be returning to public accounting after a stint in private industry. They may be coming out of one of the regional firms or one of the big four. In some rarer cases, they may be a former practice owner who has relocated to your vicinity.
This buyer typically has high enthusiasm and passion and can bring a lot of energy to your practice. They are usually looking to replace income, have less cash reserves compared to a practice owner, and may have a harder time qualifying for bank financing. The seller’s discretionary earnings are close to what they may expect, but prior to factoring in the debt service. So, profitability and cash flow are critical for this buyer to find the right practice to buy.
This is a great buyer for a seller who wishes to continue working in the practice for a year or two and is willing and available to train the buyer up in some aspects of the business until they get their feet fully under them.
The Investment Buyer
In the past few years, we have seen several investment buyers look toward tax and accounting practice acquisitions as a solid, evergreen cashflow investment option. Some are large venture capital or private equity groups, some are tax and accounting practitioners backed by venture capital, some are individual buyers who made significant money in other industries like software.
This buyer typically does not have direct experience with providing tax and accounting services and usually does not have personnel in place to provide these services or run the practices they acquire. Their approach is to buy in for a majority ownership share and take over all the back office, admin, management and personnel responsibilities the seller has been handling. The seller becomes a partner focused on the client development and client service side of the business. The acquisition is usually a cash buyout for the ownership share and an agreed ongoing compensation package for the seller.
This is the perfect buyer for a practice owner who is burned out with all the ownership responsibilities but who still loves all of the client work and interaction. Someone in their 40’s or 50’s and who is willing to stay on for ten or more years comes to mind.
In summary
Sellers have options of who they engage in their efforts to sell their practice. Who the buyer is will often dictate what the sale looks like for them regarding terms and how they continue to be involved and how long they will continue to be involved.
