So which is better, buying a CPA practice that’s up and running, or starting your own accounting firm from scratch? Both have advantages and disadvantages. First, let’s explore the advantages of each approach:
ADVANTAGES OF STARTING A CPA PRACTICE FROM SCRATCH
There are a few obvious advantages of starting a CPA practice from the ground-up, the biggest being the amount of control you have over how your firm is run. You make all the hiring decisions, create your own office space, and can choose which market you want to focus on. Other advantages include:
• All of the client relationships are your own right from the beginning.
• Starting a business can be exhilarating.
• There is very little capital required upfront.
• If you are in a fast-growing area and are a good salesperson, then revenues should ramp up fairly quickly.
• There is no debt service from an acquisition.
ADVANTAGES OF BUYING A CPA PRACTICE
On the other hand, there are also some notable advantages for buying a CPA firm, most of which involve saving time and being able to focus on higher-level work. There are systems and trained staff in place so that you can get up and running immediately, and you can learn a great deal from the seller of the firm you are purchasing (e.g. what works and what doesn’t with this particular CPA practice). Other advantages include:
• Immediate stream of revenue so the urgency to sign new clients is not so pressing.
• Revenue and expense are more predictable based on practice’s history, so there is less risk.
• The client relationships are established with the seller. Most loyal clients will transfer.
• Financing is available for acquisitions whereas start-up financing is much more difficult to secure.
There are clear advantages to both options, but let’s take a look at some of the disadvantages for each, as these will play an important role in the decision you make.
DISADVANTAGES AND POTENTIAL RISKS OF STARTING A CPA PRACTICE FROM SCRATCH
Building something from nothing takes time and a lot of grunt work, which can be boring and unprofitable. There’s also a lot of money going out with no reliable or steady source of money coming in as you work alone in building this firm’s foundation, which can also feel isolating. Other disadvantages include:
• Sometimes the eagerness to get clients, can cause you take on clients that you shouldn’t take on.
• Businesses rarely switch accountants. Building a solid revenue stream can take a while.
• You’ll need to spend a lot of time on rainmaking activities. Are you a rainmaker?
DISADVANTAGES AND RISKS OF BUYING A CPA PRACTICE
Most of the disadvantages from buying a CPA that is already up and running involve events that occur from the resulting transition of ownership. Clients may leave, staff may leave, and there may even be clients or staff that need to be terminated from the practice, depending on your preferences. Other disadvantages include:
• Debt service payments for the cost of the acquisition.
• Until you know the clients and the systems, you may have to work longer hours than the previous owner worked.
• There may be work that needs to be eliminated from the practice.
• A bigger ship is harder to steer.
Want a quick exercise to help you with your decision?
Score each of these on a scale of 1 to 10, then subtract the total score of the disadvantages from the advantages. Which method comes out ahead? Also, if you start a practice and decide it’s not going as quickly as you like, you can always try to buy later.