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Entrepreneurship in Accounting: A Comprehensive Guide to Buying Your Own CPA Firm

March 19, 2024

By Alvin Fennell III, Vice President and Senior Risk Advisor at Aon Affinity

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 add quality staff. Regardless of the reason, this article can help you navigate the process and help reduce the risk when purchasing an accounting firm.

Here’s what you need to know before, during and after buying your own CPA firm:

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. To find the right fit for you, here are some considerations on how to evaluate firms for purchase.

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.
     

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
     

Structuring the transaction

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.

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. 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.

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.

Creating and implementing uniform practices and procedures

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

Client intake – 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.

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.

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
     

Conclusion

Buying an accounting firm is no easy feat. It takes time, research and a leap of faith as you sign on the dotted line. Although this endeavor is challenging, it is rewarding once the process is complete in a strategic and planned manner.

Disclaimer

Alvin Fennell III is a vice president and senior risk advisor at Aon Affinity, the administrators of the AICPA Professional Liability Insurance Program since 1967.  Al has over 35 years’ experience working with the Program in a variety of roles, including director of underwriting, and the manager of sales and risk advisory teams. For more information about this article, contact alvin.fennell@aon.com.

This article is provided for general informational purposes only and is not intended to provide individualized business, risk management or legal advice. You should discuss your individual circumstances thoroughly with your legal and other advisors before taking any action with regard to the subject matter of this article.