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CPA Firm Mergers and Acquisitions: How to Buy a Firm, How to Sell a Firm, and How to Make the Best Deal


Chances are you’re looking to buy, sell, or merge your CPA firm. Owners at firms of all sizes are seeking solutions to fund retirements or grow their practices. And, CPA firm M&A activity is only going to increase in the coming years--new deals are announced almost daily.

Fortunately, there are steps you can take right now to position you and your firm for success. Written with both buyers and sellers in mind, this comprehensive resource aims to ensure that both parties to a transaction achieve their goals.

Authors and transition experts Joel Sinkin and Terrence Putney demonstrate that it is possible to arrive at a reasonable deal where retiring partners are paid a satisfying price for the practice they’ve built, remaining partners make more than they did before, and new owners take on a practice that is poised for continuing success and potential growth.

Sinkin and Putney share their best advice on how to:

  • Determine your firm’s value,
  • Get to know your potential partner in a deal,
  • Select a successor your clients will love,
  • Structure alternative deals,
  • Avoid roadblocks,
  • Prepare a practice continuation agreement,
  • Perform due diligence,
  • Execute a win-win deal, and
  • Time and plan for your transition.

Each chapter concludes with an Action Agenda to help spur your planning. Plus, it includes a collection of practical tools to assist you through the process of buying, selling, or merging, including practice summary tools, an annual succession planning checklist, sample practice continuation agreement, sample client announcements, due diligence tools, and sample transition letters.

Joel L. Sinkin and Terrence E. Putney are the founders of Transition Advisors, LLC, a national consulting firm that provides services exclusively to CPA firms related to ownership transition including mergers and acquisitions, succession planning, owner agreements, and owner compensation plans.
About the Authors ix

Acknowledgments xi

Introduction xiii

1 The Marketplace 1

What Are the Marketplace Trends? 2

The Overall Economy and CPA Firms 2

International Trends 4

Trends in CPA Firm Demographics 4

Technology Trends 7

Gender Trends 8

Where Do Firms Stand on Succession? 9

So, Is It a Buyer’s or a Seller’s Market? 10

Sizing Up the Seller 11

Shifts in the Mid-Size Firm Market 11

Get Ahead of the Trend 12

Exceptions to the Rule 13

Let’s Talk Technology 14

Finding Alignment 15

2 Succession: Getting the Timing Right 17

Let Me Count the Days 17

Where Do Client Loyalties Lie? 19

Unique Skills 20

What Are Your Commitments? 21

Personal and Professional Roadblocks 22

Committing to Retirement or Sale of Ownership 24

Jump Start Change 25

Sooner Rather Than Later 27

Action Agenda 27

3 How to Choose a Successor You and Your Clients Will Love 29

Think About the Four Cs 30

Chemistry 30

Capacity 32

Culture 32

Continuity 33

3 How to Choose a Successor You and Your Clients Will Love--continued What Is the Worst That Could Happen? 34

Smart Ways to Smooth the Transition 35

Worth the Effort 38

Action Agenda 39

4 Our Managers Will Buy Us Out, Right? Speed Bumps to Avoid on the Road to Internal Succession 41

What Is on Your Partners’ Minds? 42

Strengthening the Partnership Agreement 43

Protect Against Risk 44

CoverAll the Angles 45

Be Sure It Is a Workable Plan 46

Who Should Lead? 47

Training Future Leaders 47

Nonequity Partners 49

Using Mergers for Leadership Development 53

Do Not Overlook These Keys to Making a Deal Work 53

The Buyout Formula Must Be Attractive 53

Lifestyle Issues Have Become More Important to Younger Potential Successors 54

Leadership Is a Critical Attribute for Successors 54

Keep Succession in Mind With Each New Hire 55

Teamwork Is Essential to Success 55

Will the Transition Work? 55

Transitioning Client Relationships 57

Identify Critical Issues 58

Don’t Forget the Safety Net 59

Action Agenda 59

5 What Is a Firm Worth? 61

External Versus Internal Sales 61

What Is the Multiple? 62

Negotiating an Internal Sale 63

A Willing Seller Still Needs a Willing Buyer 66

Effect of Tax Treatment and Interest on Deferred Payments in Buyout Terms 72

5 What Is a Firm Worth?--continued Using Mergers and Acquisitions to Build a Succession Team and Preserve Value 72

Positioning the Firm for Possible Merger 75

What You Need to Know About External Sales 76

Net Tangible Assets 77

The Intangible Value 78

The Structure of an Acquisition 79

Price Equals Value Plus Terms 81

Factors That Affect Value 82

A Practice of Under $1Million 82

Negotiating a Deal for a Larger Firm 88

Types of Clients and Services 88

Staff 88

New Marketplaces 88

Capacity 89

Steps to Increase Value Before You Sell 89

Action Agenda 94

6 Alternative Deal Structures 95

Immediate Buyout 95

The Two-Stage Deal 97

The Cull Out Sale 101

Mergers Versus Acquisitions 103

Combination Deals in Mergers 104

Adding It Up 107

Relative Values of Two Firms in Mergers 107

Compensation Gaps 108

Dealing With Conflicting Policies 111

Other Postmerger Issues 112

Client Transition 112

Advising Clients 112

What Is Left Hanging 113

Perks 113

The Right Deal for You 114

Action Agenda 114

7 Managing Merger Minefields 115

Reasons Some Mergers Fail 115

Mergers for the Wrong Reasons 116

Poor Deal Structure 116

Business Plan Execution 116

Differences in Overhead and Profitability 117

Transition 118

Equity 119

Billing Rates 119

Differences in the Client Experience 120

Differences in Quality Control Systems 121

A Failure to Communicate 121

Ego 121

Timing 121

Potholes in the Partnership Agreement 123

Do Not Forget Accounts Receivable and Work in Process 125

Let’s Call the Whole Thing Off 127

Terms to Address 130

When a De-merger Clause Is Definitely Not Appropriate 132

Partial De-mergers 133

Merger Costs 133

Combination Affiliations 133

Action Agenda 133

8 The Power of a Practice Continuation Agreement 135

Why PCAs Matter 136

An Exit Strategy 138

What Is in a PCA? 140

The Triggering Events 140

Compensation Terms 141

Restrictive Covenants 142

Your PCA Partner:A Trusted Internal Employee 142

Your PCA Partner:A Successor Firm 143

Capacity 144

Client Service Approach 144

Service Pricing 145

8 The Power of a Practice Continuation Agreement--continued Expertise 145

Partner Demographics 145

Culture or Chemistry 145

Do Not Overlook the Small Stuff 146

Why a PCAIs Not a Good Retirement Vehicle 146

Plan for the Business of Transition 147

Planning for Leadership Interruption 148

ActionAgenda 149

9 The Keys to Due Diligence 151

Laying the Groundwork 152

What Is Due Diligence? 152

Timing:When Should the Due Diligence Review Begin? 153

Preliminary Versus Field Due Diligence 154

Protecting Proprietary Information 156

Conducting Field Due Diligence 157

Field Due Diligence for Buyers and Successors in Mergers 157

Field Due Diligence for Sellers and Firms Merging Upstream 163

Deal Terms and Due Diligence 167

Reacting to Due Diligence Findings 167

Action Agenda 167

10 Getting the Transition Just Right 169

Client Retention 170

Timing of the Announcement 170

The Message 170

Introducing the Successor 171

Involvement of Both Firms in the Communication Process 171

The Seller’s Time Commitment to the Transition 171

Staff Retention 173

Inform the Most Senior Staff Members First 173

Make a Special Announcement 174

Send an Upbeat and Positive Message 174

Tackle Compensation and Benefit Concerns 174

10 Getting the Transition Just Right--continued Address Employment Agreements 174

Clarify Reporting Relationships 175

Emphasize Career Opportunities 175

Orient New Employees 175

Maintain an Open Dialogue 175

The Transition Plan: Steps to Consider 175

Action Agenda 178

11 The Art of the Deal 181

When the Firm Opens Its Doors 181

If the Firm Is Already Up and Running 182

If You Are Planning on Internal Succession 183

If the Firm Is Very Small 183

When You Are Considering a Deal 184

When You Are Ready to Meet Candidates 184

When You Are Thinking About Timing 185

When the Deal Is Being Finalized 186

Embrace the Opportunities 187

Appendix Page

A National Management of an Accounting Practice Survey Data 189

B Annual Succession Planning Checklist 195

C Sample Practice Continuation Agreement 199

D Sample Client Announcements 209

E Due Diligence Tools 213

F Sample Transition Letters 239

G Practice Summary Sheets 249