First, a little background on possible terms that are common in the marketplace for CPA firms for sale:
Cash – This is pretty self-explanatory-The buyer pays for the practice in full. Cash deals happen much more often than most CPAs realize. At Poe Group Advisors, we believe a small sacrifice in the stated price is well worth getting the right terms. Furthermore, we believe fixed pricing helps both parties in the deal because it generally facilitates better transitions.
Earn outs – Popular deal structures used by buyers and sellers of accounting practices, but they have major drawbacks. In an earn out, a buyer pays for a practice using the earnings that are actually experienced from that practice, plus an initial down payment in some cases. In a pure earn out structure, the buyer takes no risk in the deal and pays no interest, while the seller takes all of the risk.
The continuum – Regarding sale structure, we like to think of risk of client retention in terms of a continuum. On one end of the continuum (a structure based purely on an earn-out) all risk is on the seller. On the other end of the continuum (100% cash at closing) all risk is on the buyer. There are an infinite number of solutions between those two structures that can mitigate risks posed by a particular practice. Our goal is to shift as much risk as possible to the buyer. Why? Because the buyer has the most control over client service and therefore the most control over whether or not clients will stay with the new owner. That said, there are circumstances where the buyer should not take all the risk.
Freedom for the seller
In my opinion, freedom is greatly underappreciated when most sellers are negotiating a deal. This is absolutely one of the main benefits of a fixed price structure. After a brief transition, the seller is able to focus on the next chapter of their career or their life. Earn out deals almost always come with longer transition periods, and along with that…longer-term seller worry about the buyer’s actions after closing. The long transition is built in because most sellers won’t relinquish full-control when they have not received most of their money up front. Fixed-price structures allow for fast transitions which are actually better for client and staff retention.
What does this mean for the buyer?
Earn-out deals create very blurry lines of responsibility between the buyer and the seller. When the structure of the deal is clean, there are no questions about who is responsible for what. The buyer is empowered immediately to operate the practice as he/she sees fit. Control battles are eliminated. Clients and staff immediately know who is making the decisions, and that kind of clarity is crucial for a successful hand-off.
If you’d like to read more about terms and conditions when selling your CPA firm, please check out our four (4) part series: Why Successful Accounting Practices Sell for Cash.