Due Diligence – The Decisive Data Points

Make no mistake. The buyer due diligence process in accounting firm sales is an inspection to corroborate the material aspects asserted by the seller of a CPA practice in the comprehensive financial information provided by the seller to the buyer. Due diligence is also typically performed related to certain information provided by the buyer to the seller. While many sellers feel this process of checking the books feels like a nerve-fraying invasion, take heart; if expertly handled, this process is actually less stressful than in other business sales because of the ability of CPAs to provide coherent and accurate information about their business.

In CPA practices, accountants are already under a certain level of ethical constraints to maintain their licenses, even in retirement. Nevertheless, there are key steps and points that every seller and buyer should abide by and understand to ensure that their risks are mitigated, sensitive proprietary information remains confidential, and the due diligence process is prepared for and efficiently managed.

Step: Get That NDA Signed Before Due Diligence

A guarantee of confidentiality is critical to securing maximum value. The absolute first step in interacting with potential buyers should without exception always be a potential buyer-signed nondisclosure agreement (NDA), otherwise known as a confidentially agreement. The NDA should clearly restrain a buyer from disclosing sensitive information with the public or industry, to include not contacting your clients and employees, and specifically outline the only acceptable ways this information can be used. It should also outline the consequences of disclosure. Without an NDA, the seller is exposed to unmitigated risk.

We believe achieving maximum value is typically unattainable for the CPA trying to sell his/her own firm if they intend to perform the level of promotional, marketing, and negotiating efforts necessary to find the right buyer on their own. Furthermore, a seller representing himself/herself can never maintain confidentiality at the same level a broker can. We, at Accounting Broker, are unyielding in our obsession with maintaining the highest level of confidentiality humanly possible.

Step: Furnishing the Comprehensive Summary of Financial Information

With a signed NDA in hand, prospective buyers will then be furnished with comprehensive financial information, but only in redacted form to maintain airtight confidentiality. The objective of providing such comprehensive information is to leave few questions in the buyers’ minds about the CPA firm for sale, including the type of work performed, profitability, employees, and other material information a purchaser would typically need to know in order to make an offer. If the CPA practice for sale is truly ready to sell, comprehensive information provided early in the process produces multiple and competing offers, maximizing the firm’s market value and exponentially increases the amount of cash at closing offered.

We rigorously subject comprehensive financial information to a multi-step review process to ensure that any information specifically identifying the firm or its owner is redacted. We then confidentially speak with the largest pool of potential buyers who we have already identified as pro-actively seeking to purchase the particular type of accounting firm for sale at hand. From this buyer pool we conduct a pre-negotiation to screen out “bottom feeders” and earnout-only buyers. We provide the seller with a short-list of the most qualified buyers, from which the seller then chooses who to meet face-to-face.

Step: Agree to LOI Deadlines

Assuming an offer has been made and accepted, few accounting practice sales should ever move into the due diligence phase without both buyer and seller agreeing to an LOI in writing, regardless of how “perfect” a potential buyer may seem. While non-binding, the LOI details the buyer’s offer including the price, material terms, and conditions, but also the schedule of the sales process all the way to closing, also called contingencies. These contingencies govern when due diligence, financing, and the closing of the sale must be complete.

Two important inferences can be made when there are problems with the LOI. If the buyer misses the due diligence deadline, that is a sign that the buyer is no longer committed to closing the deal, and a signal for the seller to move on to the next potential buyer. If a buyer is unyielding in refusing to make a written offer and signing an LOI prior to conducting due diligence, this buyer may not be serious about the transaction and is wasting everyone’s time, or worse. Again, this is where having a broker can save the seller much time and trouble.

Step: Due Diligence

We are not kidding. Confidentiality is crucial to preserving the value of a CPA practice in the sales process. Despite the broker’s NDA signed by the buyer, we require that an additional nondisclosure agreement (NDA) is signed directly between the seller and the buyer regarding any information obtained by the buyer during the due diligence process. (This NDA is an additional layer of security to the previously signed NDA between Accounting Broker and the buyer). The seller should not allow the buyer to begin the due diligence process until this second agreement is executed.

The potential buyer has received the comprehensive summary of financial information at this point, and is therefore already familiar with the major material aspects of the CPA firm for sale. Due diligence should be concluded efficiently. The buyer should be able to get all necessary information in two or three meetings unless there are extenuating circumstances.

The due diligence process is also the opportunity for the seller to conduct a more thorough evaluation of the buyer, including qualifications, skills, creditworthiness, personality and approach to management, and to assess whether this person would be a good fit and leader. There should be a reasonable timetable set for the due diligence process to transpire, including specific times for office visits, and the conclusion.

Warning signs that the buyer is getting cold feet or will attempt to force a sale price reduction include attempts to postpone the due diligence process by five or six weeks without a substantive reason; or the buyer should have concluded the process but is asking for more and more information. In either case the accountancy broker should negotiate with the buyer. If that fails to produce a conclusion, the seller should cut his or her losses in terms of time and move on to the next buyer.

Get Professionals On Your Sales Team

Most sellers do not have the time, the patience, or the M&A skills necessary to navigate this process, maintain confidentiality, and achieve maximum market value with the most cash at closing. We have promoted and negotiated hundreds of deals, involving many millions of dollars in value for sole practitioners, small partnerships, and larger firms.

No business brokerage understands the value of accountancy practices the way we do. Why? We are the only firm of our type in the nation where 100% of the business brokers are CPAs with significant “Big Four” M&A experience. We have the largest national database of qualified legitimate buyers for accounting firms who are willing to compete for your practice. Contact us and see how our proven methods consistently achieve significantly higher sales prices and cash at closing for accounting practices than any of our competitors in the nation.

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