When considering purchasing an accounting practice it is beneficial to consider factors that may cause a business to fail.  These 5 factors can be camouflaged pitfalls in some business that are for sale.  Identifying these will help make sure you know what that the financial position is, of the accounting practice for sale.  Studying how these influence the business will show you how much that business is really worth.

1 - A Biased Purchase Contract
When using a broker to find an accounting firm to purchase, the contract agreement may not be equally beneficial.  The broker may get a higher commission or have a deadline to meet when contracted to sell a certain practice.

2 - No Plan for Revenue Generation
A mistake can be made to expect the same cash flow to just switch hands after a purchase.  During ownership transition, there is always a loss of clientele, but the variable is the degree of loss.  It is important to have a plan of attack even before selecting a firm to purchase.  An effective strategy to immediately counter revenue loss is to add other financial related services.

3 - Maintaining a Status Quo or Not
After the sale is made the seller can either phase out or walk out. If the seller takes the money and runs, maintaining the status quo and continuing the process of business is a great idea, for at least the first year. When the seller slowly fades away in an earn out provision of the contract, it is a good time to make changes here and there. This allows the seller to be part of the transition and can give valuable advice to what they may have tried in the past with their clientele.

4 - Not Maximizing Your Working Capital
Buyers can get very excited and emotional when finding accounting practice sales. This emotion can lead to thinking only of purchasing the firm and no further. This blindness makes it difficult to remember to figure in the needed operating expenses during the start-up. Without working capital to keep the practice running smooth, already weary customers are likely to scurry away to another firm.

5 - Ignoring Utilization vs. Realization
Utilization is work percentage.  Utilization of 75% means three quarters of the time is spent with a customer, phone call, etc. and the other quarter is idle time.  For a business to satisfy customers, utilization should not consistently be over 100%.  This mean people should not be kept waiting for a very long period of time.  Conversely, to efficiently use your time, it should be at least 75%. Realization is actually receiving money, not just agreeing to a deal.  The reason this is important is obvious, but make sure to find the ratio of dollars sold versus dollars collected.

In doing your homework, you will be prepared, therefore increasing the accounting profit of your practice. Follow these 5 guidelines and the market will be much safer to purchase a quality business that produces a lifetime of income until you want to retire and sell it again.


About the author:
Troy C. Patton is a Certified Public Accountant who was named the youngest CPA to be voted the Most Outstanding CPA in Indiana in Public Practice. He has consulted with over 200 accountants regarding aquisition or sale of practices. He has purchased 12 accounting practices personally.