Embarking on the journey to acquire an accounting practice is more than just a business transaction; it is an investment in your future and a commitment to serving a community of clients. Understanding how to fund this major purchase is a critical first step that can determine the success and ease of the entire acquisition process. Read on to explore the various financial options for buying an accounting practice so you can make informed decisions that align with your professional and financial goals.
Traditional Bank Loans
Aspiring firm owners often begin with conventional loans from commercial banks. These loans typically offer competitive interest rates and favorable terms for well-qualified buyers.
To qualify, you will generally need a substantial down payment, often around 20–30 percent of the purchase price, and a strong credit score. Banks want to see a history of financial responsibility and a clear capacity to manage the debt service.
Additionally, the application process for a conventional loan is rigorous. You will need to compile a comprehensive loan package that includes personal and business tax returns, financial statements, and a detailed business plan.
The bank will conduct its own due diligence on the accounting practice you intend to buy, evaluating its profitability, operational efficiency, and market position. This process can be lengthy, so it is wise to start discussions with lenders early in your acquisition journey.
Working with a bank experienced in professional practice lending can be a significant advantage. These lenders understand the unique valuation models and cash flow characteristics of accounting firms. They can assess the inherent value of a client list and the goodwill associated with an established practice.
SBA Loans
The U.S. Small Business Administration (SBA) offers loan programs that are exceptionally well-suited for buying an accounting practice. Although participating lenders issue the loans instead of the SBA, the agency partially guarantees them. This guarantee reduces the lender’s risk, often making them more willing to offer flexible financing.
The most common program for practice acquisitions is the SBA 7(a) loan. This program offers longer repayment terms, often up to 10 years, which can result in lower monthly payments and improved cash flow for the new owner.
Furthermore, the down payment requirements are typically lower, sometimes as little as 10 percent of the purchase price. This makes ownership accessible to a broader range of qualified buyers who may not have the liquid capital required to obtain a traditional loan.
Securing an SBA loan involves a detailed application process similar to a conventional loan, but with additional SBA-specific paperwork. Lenders will still look for strong personal credit, relevant industry experience, and a solid business plan.
An SBA loan can also bridge the gap for qualified buyers, making it easier for them to secure financing and retain more working capital to invest in essential areas such as technology upgrades, staff development, or targeted marketing in their critical first year of ownership.
Seller Financing
Seller financing, also known as owner financing, is a powerful and increasingly common tool for acquiring accounting practices. In this arrangement, the seller acts as the lender, providing the buyer with a loan for a portion of the purchase price.
This demonstrates the seller’s confidence in the practice's future success and in the buyer’s ability to lead it. It also indicates the seller has a vested interest in a smooth and successful transition.
This financing method offers significant benefits for both parties. For the buyer, it can simplify the financing process, reduce reliance on traditional banks, and potentially lower closing costs. For the seller, it can result in a faster sale, a higher overall purchase price, and a steady stream of income from the loan payments. The terms of a seller-financed note, including the interest rate, repayment period, and down payment, are entirely negotiable between the buyer and seller.
Seller financing is often used in conjunction with a traditional or SBA loan. For example, a buyer might secure a bank loan for 70 percent of the price, provide a 10 percent cash down payment, and have the seller finance the remaining 20 percent. This structure can make a deal more attractive to a bank, as it demonstrates the seller’s commitment to the transition’s success.
Other Creative Financing Solutions
There are several other financial options for buying an accounting practice that can help you secure the capital needed for your acquisition. Each offers unique advantages and considerations, allowing you to tailor your financing approach to your personal and business goals.
Home Equity Line of Credit
A home equity line of credit can serve as a source of funds for your down payment. This approach leverages your personal assets and provides flexible access to cash. However, it requires careful consideration of the risks associated with using your home as collateral.
Personal Savings and Retirement Funds
Using personal savings or tapping into retirement accounts, such as a 401(k) through a rollover for a business start-up plan, can provide essential liquidity. Although this strategy puts your own funds to work, it is crucial to weigh the potential tax implications and risks to your long-term financial security.
Financial Partners and Investors
Bringing in a financial partner or investor may boost your purchasing power or enable you to pursue a larger firm. Whether you opt for a silent partner with capital or an active investor who shares in the management of the business, clear legal agreements are essential for establishing trust and protecting your interests.
Exploring all avenues enables you to build a financing structure that works for your unique situation. Some may find that the best solution is a hybrid approach that combines different funding sources. By thinking creatively and strategically, you can assemble the necessary financing to turn your dream of owning an accounting practice into a reality.
Navigating the financial side of an acquisition can feel daunting, but with the right knowledge and support, it is achievable. A successful purchase provides a solid financial foundation that allows you to transition smoothly and focus on serving your new clients.
When you are ready to review accounting firms for sale and obtain guidance on structuring a deal, contact Private Practice Transitions. We have experience helping companies grow through acquisitions and assisting CPAs who want to make their mark in the sector through a previously owned practice.
