Buying a tax business

[Steve M]

I have an opportunity to expand my business as another preparer in the same building wants to sell his business. He has been established for quite a few years and wants to retire. Has approximately 300 clients.

Any suggestions as to how to value the business so I can make an offer?

Steve M

[joelgilb]

I have an opportunity to expand my business as another preparer in the same building wants to sell his business. He has been established for quite a few years and wants to retire. Has approximately 300 clients.

Any suggestions as to how to value the business so I can make an offer?

Steve M

So you know my background. I am a CPA attorney that has helped with closing of others practices over the years. An I have done business valuations for a CPA firm several years ago, but dropped this part of my practice in more recent years.

Generally, a professional's practice is generally worth a multiple of gross billings, usually somewhere from 1 to 3 times one years revenues, but probably for a basic tax practice on the low end (1 time).

Some concerns:

You don't want to pay for what doesn't come back in the door next year.

You want the prior preparer to smooth the way as he has a relationship with these clients. Without him, even if they come back the next year they might not stay.

You want to insure they come back more than one year, at least 3 for it to be worth your while to pay for it, so an installment sale tied to annual revenues is essential. Typically a small down payment and then spread the receipts over the next 3 years evenly (Seller will want to front load). This way you do not pay for clients that leave and you can still make a living doing the returns even if you have to pay staff.

Additionally if you can do services for them that the prior Tax Practitioner does not do, this should not be revenues you pay for. And this needs to be stated in the contract, or they can expect value here.

Hope that helps

Joel

[1040PRO]

In most cases the only reason some one goes to a preparer is becuase they like the preparer or the preparer allows thing that some might not.

with this in mind his business is worthless .. if I was to purchase I would only pay him a flat fee or a percentage of billed per client after the tax year was over.

It my experience that most will still prepare return on the side with out letting you know (with or with out a non compete clause -- try to enforce one in court $/time) people will still find him if they realy want him.

I would say that most of his clients might come to you the first year, but when you meet with them you may not like them or they may not like your style.

if he uses the same software as you do make sure you get a complete copy of his 2007 returns on hard drive, so rollover is alot easier.

have taken on several businesses and seems to be the usual

CLIFF

1040PRO of AZ

[michaelmars]

all of the above is good. I last did, 1x billings payable over 5 years for personal returns. seller got 25% of my collections so if i lost client during 4 years i stopped paying for them. Raises were mine, payout based on sellers last years fee. Seller had to gaurantee me X amount of hours a week to consult or talk with client to smooth things over or to comfort larger clients. we agreed to hourly rate for excess hours. Business clients were either 1.25 or 1.5 x billings. payable over 5 years.

Prior years software was included in purchase.

[joelgilb]

In most cases the only reason some one goes to a preparer is becuase they like the preparer or the preparer allows thing that some might not.

with this in mind his business is worthless .. if I was to purchase I would only pay him a flat fee or a percentage of billed per client after the tax year was over.

It my experience that most will still prepare return on the side with out letting you know (with or with out a non compete clause -- try to enforce one in court $/time) people will still find him if they realy want him.

I would say that most of his clients might come to you the first year, but when you meet with them you may not like them or they may not like your style.

if he uses the same software as you do make sure you get a complete copy of his 2007 returns on hard drive, so rollover is alot easier.

have taken on several businesses and seems to be the usual

CLIFF

1040PRO of AZ

Hmm, Are you suggesting that tax preparers are not to be trusted? Will he cheat his clients as well as the person that buyshis practice?

There are ways to protect from him continuing to serve the client base he sold and the are he agreed not to practice in, such as liquidated damages clauses requiring the Seller to pay 3 times the fee that was prev charged for any work he does that breaches the non-compete. Most jurisdictions will uphold these clauses. Besides, if he is selling a practice of 300 clients, what makes you think he will keep doing this on the side? Wouldn't he be better off not selling?

That said there may be reasons to question why he is selling his practice that you should look into. Question him as to why he is getting out.

Is he getting his clients in trouble and trying to bale to protect himself? Had a CPA do that recently and sell his practice to another. The new CPA is dealing with the day to day and having me represent them in front of both IRS and Tax Court. Many of the clients are in trouble. So is a good point to really look at what he has been doing and to see if his audit rate has gone up. Call the clients and talk with them and see what they think of him. Do your Due Diligence!

Also, get an attorney that understands the sale of professional practices and interview him in regards to his experience. You might be surprised how invaluable he will be.

[joelgilb]

all of the above is good. I last did, 1x billings payable over 5 years for personal returns. seller got 25% of my collections so if i lost client during 4 years i stopped paying for them. Raises were mine, payout based on sellers last years fee. Seller had to gaurantee me X amount of hours a week to consult or talk with client to smooth things over or to comfort larger clients. we agreed to hourly rate for excess hours. Business clients were either 1.25 or 1.5 x billings. payable over 5 years.

Prior years software was included in purchase.

These are also good points. As I said in my previous post. Do your Due Diligence and get good legal advice from a knowledgible attorney. Buying a service business does have certain risks you need to both be aware of and protect against. For instance, a lot of States do not like Non-compete agreements. So you need an attorney that understands the laws and Judical issues in your State.