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Buying a firm

Insights designed to help reduce risk when purchasing an accounting firm

Insights designed to help reduce risk when purchasing an accounting firm

There are many reasons why you may want to purchase an accounting firm. Perhaps you are looking to increase your geographic reach, expand into a new area of practice, or looking for a way to add quality staff. Regardless of the reason, the information within this ebook can help you navigate the process. You’ll find simple checklists, guidance, and insight designed to help reduce risk when purchasing an accounting firm.

1

Finding the right firm

The first step of purchasing a firm is, naturally, to find a firm to buy. This process can be lengthy but the time dedicated is often necessary. Without thorough investigation and due diligence, you may find yourself disappointed with your acquisition. It is essential to find a firm that has high potential for profit with minimal risk. In this section, we will walk you through the process of how to evaluate firms for purchase.

Practices and procedures

The rules a firm implements can say a lot about what they value.

When considering the purchase of a firm, you may want to review their policies on:

  • Vacation and PTO policies
  • Dress code
  • Compensation equity
  • Billing procedures
  • Billable hour requirements
  • HR and dispute policies

Quality control

Firms with poor quality control are more likely to have professional liability claims. When purchasing a firm, it’s important to assess the target firm for any potential risks.

Some steps you may want to take:

  • Read the firm’s most recent peer review report
  • Ask for copies of quality-control manuals
  • Ask how principals from the target firm monitor quality control
  • Research the firm’s policies related to supervision, engagement letters, engagement assignments, documentation, and review requirements
  • Find out if the target firm adheres to written policies
  • Determine if any issues you uncover can be resolved in the integration process

Engagement, acceptance and continuance policies

Pay special attention to the target firm's engagement acceptance and continuation practices. Claims can arise from high-risk clients, so you will want to identify how clients are vetted.

You may want to:

  • Review the target firm's client and engagement acceptance and continuance policies
  • Decide if the firm's policies are adequate, or need improvement
  • Pinpoint any clients or engagements where additional risk management may be needed

Information technology

The potential for cybercrime is a concern for most accounting firms, so consider the target firm’s:

  • Data security and response plans
  • Password policies
  • On-Premises data security
  • Equipment inventory
  • Client data protocols
  • Cybercrime insurance plans

Financial statements

Reviewing the target firm’s financial statements can help you gain insight on the potential value of acquiring the firm. 

Consider the following:

  • Review several years of documentation to see how the firm’s profits and billing practices have changed over the years.
  • Check if billing practices are consistent amongst all departments.
  • Determine if there are any areas where the firm could increase rates.
Once your review of the target firm is completed, if you decide to proceed with an offer then you can begin the process of crafting the purchase transaction.

Personnel

When purchasing a firm, you are also purchasing the experience and liability of the target firm’s workforce. To help reduce the risk of professional liability claims, it pays to have a deep knowledge of the strengths and weaknesses of the target firm’s staff. 

Consider the following when assessing personnel:

  • Confirm education, experience, licenses, and professional designations
  • Ask the target firm for records related to staff disciplinary and regulatory history
  • Make sure staff is in good standing with state boards and professional associations
  • Determine target firm staff niches that may or may not fit within your firm, and determine if training will be needed for your current managers/employees to be able to supervise them
  • Find out if any employees have noncompete agreements, and determine how this may affect future work
  • Determine whether there are any open or recent complaints to HR by the target firm’s employees

Culture

There are many benefits to having a strong, defined company culture. First and foremost, employees who understand and embrace their company’s culture are often happier and more productive. 

To assess a target firm’s culture, you may want to review the following:

  • Firm mission statement
  • Relationship between partners and non-partners
  • Office amenities
  • Tax season policies
  • Staff diversity and demographics
  • Mentorship programs
  • Workplace reviews from both current and former employees
  • Hybrid work policies
Quality control
Firms with poor quality control are more likely to have professional liability
claims. When purchasing a firm, it’s important to assess the target firm for
any potential risks. Some steps you may want to take:
  • Read the firm’s most recent peer review report
  • Ask for copies of quality-control manuals
  • Ask how principals from the target firm monitor quality control
  • Research the firm’s policies related to supervision, engagement letters, engagement assignments, documentation, and review requirements
  • Find out if the target firm adheres to written policies
  • Determine if any issues you uncover can be resolved in the integration process
Engagement, acceptance and continuance policies
Pay special attention to the target firm's engagement acceptance and continuation practices. Claims can arise from high-risk clients, so you will want to identify how clients are vetted. You may want to:
  • Review the target firm's client and engagement acceptance and continuance policies
  • Decide if the firm's policies are adequate, or need improvement
  • Pinpoint any clients or engagements where additional risk management may be needed
Financial Statements
Reviewing the target firm’s financial statements can help you gain insight on the potential value of acquiring the firm. Consider the following:
  • Review several years of documentation to see how the firm’s profits and billing practices have changed over the years.
  • Check if billing practices are consistent amongst all departments.
  • Determine if there are any areas where the firm could increase rates.
Once your review of the target firm is completed, if you decide to proceed with an offer then you can begin the process of crafting the purchase transaction.
Culture
There are many benefits to having a strong, defined company culture. First and foremost, employees who understand and embrace their company’s culture are often happier and more productive. To assess a target firm’s culture, you may want to review the following:
  • Firm mission statement
  • Relationship between partners and non-partners
  • Office amenities
  • Tax season policies
  • Staff diversity and demographics
  • Mentorship programs
  • Workplace reviews from both current and former employees
  • Hybrid work policies
Personnel
When purchasing a firm, you are also purchasing the experience and liability of the target firm’s workforce. To help reduce the risk of professional liability claims, it pays to have a deep knowledge of the strengths and weaknesses of the target firm’s staff. Consider the following when assessing personnel:
  • Confirm education, experience, licenses, and professional designations
  • Ask the target firm for records related to staff disciplinary and regulatory history
  • Make sure staff is in good standing with state boards and professional associations
  • Determine target firm staff niches that may or may not fit within your firm, and determine if training will be needed for your current managers/employees to be able to supervise them
  • Find out if any employees have noncompete agreements, and determine how this may affect future work
  • Determine whether there are any open or recent complaints to HR by the target firm’s employees
Information technology
The potential for cybercrime is a concern for most accounting firms, so consider the target firm’s:

 

  • Data security and response plans
  • Password policies
  • On-Premises data security
  • Financial statements
  • Equipment inventory
  • Client data protocols
  • Cybercrime insurance plans

Client details

An accounting firm’s clients are its most valuable asset. Reviewing the target firm’s client list can help you predict future earnings.

Here are some things to consider:

How loyal are clients?
Is the client base diverse, or do they come from the same industry?
How responsive are the firm’s clients?
Are there opportunities to perform additional services for current clients?
Do clients pay on time?
Do the clients pass your firm’s current client acceptance and continuance requirements?
Once you have completed your target firm review, you can begin the process of crafting the purchase transaction.

2

How to structure the deal

When structuring the transaction, your goal should be to set it up in such a way to help limit your risk. The two ways accounting firms are acquired are either via an asset purchase or merger.
One way is 

asset 

purchases

In asset acquisitions, the buyer chooses which assets and liabilities they want to take on, often agreeing to purchase specific liabilities of the purchased firm.
The purchased assets can include a wide range of items, such as:
  • Real estate
  • Contract rights
  • Inventory
  • Intellectual property
  • Office equipment
  • Accounts receivable

Purchased liabilities may include:

  • Contracts
  • Accounts payable
  • Employment-related liability
An asset purchase is often favored by most buyers because they can choose what to purchase and avoid the prospect of unknown liabilities from the target firm. Firms may prefer asset purchases if they are selling just one subset of their assets, rather than the entire firm.
Another way is 

mergers

Mergers are the combination of two separate companies joining to become one legal entity. In a merger, the owner of the target firm is given shares from the buying company, cash, or a combination of the two. Once the merger is complete, one of the firms will become the “surviving corporation” and the other will be the “merged corporation.”
Mergers may be preferable if you want to avoid long negotiations because mergers only need a simple majority of shareholders from both corporations to approve the transaction. Also, all liabilities and assets are immediately passed to the surviving corporation upon completion of the transaction.
One way is asset purchaes
In asset acquisitions, the buyer chooses which assets and liabilities they want to take on, often agreeing to purchase specific liabilities of the purchased firm.

The purchased assets can include a wide range of items, such as:

  • Real estate
  • Contract rights
  • Office equipment
  • Accounts receivable
  • Inventory
  • Intellectual property
Purchased liabilities may include:
  • Contracts
  • Accounts payable
  • Employment-related liability
An asset purchase is often favored by most buyers because they can choose what to purchase and avoid the prospect of unknown liabilities from the target firm. Firms may prefer asset purchases if they are selling just one subset of their assets, rather than the entire firm.
Another way is mergers
Mergers are the combination of two separate companies joining to become one legal entity. In a merger, the owner of the target firm is given shares from the buying company, cash, or a combination of the two. Once the merger is complete, one of the firms will become the “surviving corporation” and the other will be the “merged corporation.”

Mergers may be preferable if you want to avoid long negotiations because mergers only need a simple majority of shareholders from both corporations to approve the transaction. Also, all liabilities and assets are immediately passed to the surviving corporation upon completion of the transaction.

Personnel
When purchasing a firm, you are also purchasing the experience and liability of the target firm’s workforce. To help reduce the risk of professional liability claims, it pays to have a deep knowledge of the strengths and weaknesses of the target firm’s staff. Consider the following when assessing personnel:
  • Confirm education, experience, licenses, and professional designations
  • Ask the target firm for records related to staff disciplinary and regulatory history
  • Make sure staff is in good standing with state boards and professional associations
  • Determine target firm staff niches that may or may not fit within your firm, and determine if training will be needed for your current managers/employees to be able to supervise them
  • Find out if any employees have noncompete agreements, and determine how this may affect future work
  • Determine whether there are any open or recent complaints to HR by the target firm’s employees
Information technology
The potential for cybercrime is a concern for most accounting firms, so consider the target firm’s:

 

  • Data security and response plans
  • Password policies
  • On-Premises data security
  • Financial statements
  • Equipment inventory
  • Client data protocols
  • Cybercrime insurance plans

3

Creating and implementing uniform practices and procedures

Uniform procedures can help both the target and purchasing firm during the transition of ownership.

Most importantly,

provide clear policies

Clarity can efficiently serve your clients during the process.
When creating uniform policies, you may want to focus on:

Pay equity audit

Pay equity builds trust with your employees. Firms with clear, transparent compensation information tend to have happier, harder-working, and more loyal employees. Before taking ownership of your new firm, evaluate their pay levels and make sure there isn’t a disparity with your existing staff. If there is, create a plan to resolve the issue, document it, and share it with employees.

Billing operations

Review the target firm’s billing policies, designate and incorporate the procedures that are valuable, then discard the rest. Then when it comes to pricing methods, you will likely want to determine which you will continue, which you will change, and decide how to monitor and review the process once the purchase is complete.

Networking

One of the most important things you can do is create a streamlined, organized, uniform client intake process. Engagement letters establish a framework for your relationship with a client as well as define the scope of your work and can be extremely valuable should a claim arise. Create an onboarding and engagement letter process, document the steps, and train all employees.

 

As the transfer of the firm’s ownership nears, you can send a written notice to the target firm’s clients informing them of the purchase and advising them that they will need to sign a new engagement letter once the purchase is complete.

 

If there are clients of the target firm that will not be clients of the acquiring firm (or in the event of a merger, the merged corporation), then letters should be sent to those clients terminating the relationship.

Human resources

Make sure HR policies are written down and given to all new employees. If merging with a firm in a new jurisdiction, you may need to update policies to comply with state and local laws.

4

Practice-specific considerations

At the start of the search for a firm to buy, it can be easy to think of each business as a collection of data to compare, but each accounting firm has its own personality and individual needs.

As you get closer to making a deal

Think of what makes a target firm unique so you can address risks, plan staffing, establish uniform policies, and ensure the appropriate level of insurance coverage is in place.
Practice-specific questions to consider:
Will your existing staff need to learn about a new area of practice in order to manage the target firm's specialties?
Do you have the appropriate level of staff to manage the target firm?
If purchasing an audit practice, are there any independence, conflicts of interest or non-compete issues?
If the target firm operates in high-risk practice areas do the benefits of continuing the specialty outweigh the risks?

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5

Determining adequacy of insurance coverages

Before purchasing a firm, you will want to investigate its insurance coverages and risks. To determine if the firm has enough coverage, you may want to ask the target firm for details on claims or potential claims from the last five or ten years. It can also be valuable to request information on any circumstances that were not reported to insurers, as well as a rundown on any pending complaints or disputes.

 

Once you have identified the target firm’s level of risk, it will help you decide if they have adequate insurance coverage, or if more is needed.

Some insurance policies to consider include:
  • Professional Liability
  • Cyber Liability
  • Employment Practices Liability
  • Directors and Officers (Management Liability)
  • Crime Coverage
Consider requiring the target firm to add an Extended Claim Reporting Period (ECRP) endorsement to any and all coverage it has (and where ECRP is an option) if there is the potential for exposure after the purchase. Often referred to as tail coverage, ERCP gives allowances so claims that occurred when the policy was active can still be reported within a set period after the policy expires.

Buying an accounting firm is no easy feat

It takes time, research, and a leap of faith as you sign on the dotted line. Once you have completed your asset purchase or merger, you may want to breathe of sigh relief and rest.

 

However, completing your purchase is merely the start of a new journey. There will be plenty of work to do as you build your business and get to know your employees. We wish you all the best as you navigate the purchase process and move into the next stage of your business.

For a complimentary insurance risk consultation

Please call Monday through Friday, 8 a.m. to 6 p.m. ET, to speak with a personal insurance advisor. To review our insurance portfolio and risk mitigation resources visit cpai.com.

Note: The information contained in this guide is designed to provide a general overview to starting a business and is not intended to address all issues or provide individual guidance or advice. For professional information and advice, be sure to contact your attorney, financial planner, retirement, or others for guidance. Examples are for illustrative purposes only and not intended to establish any standards of care or serve as legal advice.

Aon Insurance Services is the brand name for the brokerage and program administration operations of Affinity Insurance Services, Inc. (TX 13695), (AR 100106022); in CA and MN, AIS Affinity Insurance Agency, Inc. (CA 0795465); in OK, AIS Affinity Insurance Services Inc.; in CA, Aon Affinity Insurance Services, Inc. (CA 0G94493), Aon Direct Insurance Administrator and Berkely Insurance Agency; and in NY, AIS Affinity Insurance Agency.