Selling or Buying an Accounting Practice in Today's Credit Crisis
With daily headlines proclaiming gloom and doom and such notables as Alan Greenspan declaring that we have hit a “once-in-a-century credit tsunami'' it is no wonder we might be anxious. Owners contemplating retirement as well as individuals looking to buy a firm may be rethinking those decisions. But, like most things in life, we make the best choices when we understand the circumstances and facts.
The fact is that the current economic situation may impact either sellers or buyers. However, it does not mean that plans for sales or purchases cannot proceed. Traditionally, all accounting practices sold with some form of seller financing. It has only been in the last few years that lenders, particularly SBA lenders, have discovered that accountants are good credit risks despite the fact that accounting and tax practices are made up of basically blue sky, with few hard assets as collateral. With lenders more amenable to backing up professional practices and with a more developed market and experienced brokers it had become more common to see sellers getting all cash at closing. The availability of outside financing just gave buyers and sellers more options.
However, the credit crisis has affected this somewhat. Some lenders, even some of the larger SBA lenders, relied heavily on secondary markets for their loans and when that dried up some lenders have stopped, at least temporarily, lending on professional practices. At this point, there are still active lenders but they may be harder to find and lending standards may be tighter. Marginal deals involving such things as buyers without strong credit scores or practices with less desirable factors like a mediocre cash flow may have to revert back to seller financing. So parties would be wise to be flexible on their expectations when it comes to terms. Outside financing is still available in the right situations but buyers and sellers will just need to be patient and work a little more closely with lenders and brokers. That is why it is more important than ever to team up with someone like APS who still has the lending resources.
How are practice valuations affected? The surprising answer is: probably not much. Valuations of accounting and tax practices have tended to remain steady. Since accounting practices seldom rely on credit themselves they usually are not so vulnerable to the credit markets that other industries are. Certainly a general economic downturn could affect the profitability of some practices but most of the work accountants do is not discretionary for clients. People still need tax preparation and help with their businesses. And the principle that valuation is ultimately affected by the number of buyers and sellers does not signal necessarily a decrease in valuations. The number of practices on the market could temporarily decline as some owners may put off selling due to either fear of lower valuations or the discovery that their own personal assets may have declined. However, that situation would, in fact, point to higher or steady valuations. And there probably won’t be fewer buyers. Certainly some buyers will find their own situation will put off a purchase but, interestingly, layoffs sometimes create more buyers looking for opportunities and favorable interest rates could entice buyers. So while the credit crisis may affect terms and, in some cases, the ability to obtain outside financing, valuations are likely to persist. Remember that in the end the best opportunity to get full value comes when you have a large pool of buyers and APS has that pool.
Practices are still being bought and sold. Opportunities are still there. Buyers and sellers are encouraged to be patient and flexible and to seek experienced help that Accounting Practice Sales can offer. Good brokers should earn their keep more than ever now!