The Importance of a Letter of Intent in Accounting Practice Sales

Minimizing risk should be as important as maximizing the sales price and terms of an accounting practice for sale. Assuming you have used our proven methods and have identified a qualified buyer from a competitive pool, whom you judge to be the right fit for your CPA practice for sale, and who appears to be willing to offer maximum value with the most cash at closing, it is time to draft and agree on a Letter of Intent (LOI).

Some business brokers will advise you skip the LOI altogether; arguing that an LOI is a waste of time and effort in accounting practice sales. If this is your broker, it would be prudent to consider whether that brokerage is faithfully representing your interests, and has the right skill set to structure a deal that does not force you to leave cash on the table at closing, or worse.

The LOI, while admittedly non-binding, is the first document detailing what the buyer is willing to pay for your accounting practice; including the price, terms, and conditions that will guide the sales process to closing. No accounting practice sale should move into the due diligence phase without an LOI that has been agreed to in writing by both parties.

Most LOIs for the sale of an accounting practice should include the contingencies outlined below:

  1. Satisfactory Performance of Due Diligence
  2. Assuming the buyer of an accounting practice for sale has first signed a non-disclosure agreement, the buyer will need to inspect the accounting firm’s books in order to corroborate the accuracy of what the seller has presented. The buyer will look at source documentation detailing the P&L statements, the client list, the employees, as well as the physical office and lease terms.

    The length of time this process will take is correlated to the complexity and size of the accounting practice for sale. Nevertheless, there must be an agreed deadline for this process to conclude. If this deadline is missed, it could be a signal that the buyer is just kicking tires or has developed “cold feet”. It could also be the signal to move on to the next buyer.

    While the buyer is performing their due diligence, the seller should research the buyer’s experience. The buyer’s qualifications, reputation, capacity to do the work, and readiness to take over the firm should all be taken into consideration at this time.

  3. Financing Contingency (if applicable)
  4. While some accounting practice sales do not require financing, most do. No matter whether the buyer is approaching a bank for a conventional business loan, or an SBA-backed loan, the buyer and the firm being sold will need to undergo the underwriting process, which varies in length, depending on the lender.

    If the buyer is unable to secure financing, the deal is dead. This is the very scenario that will prove the worth of your broker. This should not happen if the broker has selected the right buyer and has the right lenders available to refer to the buyer.

    We have a large group of lenders that are ready, willing, and able to provide financing for accounting practice sales. We have worked extensively with these lenders in closing other accounting practice sales. They are ready to close on time and do not get heart-burn when they see the high price and cash at closing amount that we typically achieve for our sellers.

    When a buyer does not apply for financing in a timely manner, it could be another sign that the buyer has developed cold feet. Again, a deadline for when the buyer should apply for financing and when financing must be approved is essential to any LOI.

  5. Purchase and Sale Agreement (P&S)
  6. The drafting of the P&S should include not only the major provisions of the LOI, but will also contain all of the fine details of the accounting practice sale. The details will include the myriad of deal points that were not addressed in the LOI. The P&S will also detail how much transition time the seller would be required to give, and how much the seller will be paid for part-time billable work or rainmaking work; assuming they both want this arrangement. It may also address certain employee issues.

    Most of the time, the buyer’s attorney will prepare the P&S. While retaining an attorney to review this agreement is advisable, having the wrong attorney could unnecessarily complicate the process and even kill a great deal. Attorneys who have solid experience specifically in M&A transactions should know exactly how to facilitate a deal and even expedite the process, and should not attempt to create roadblocks. A good accounting practice sales broker should be willing and able to provide a sample agreement to minimize legal cost.

Generally, the LOI will include a provision directing the seller not to negotiate with any other potential buyer during the stated term of the LOI.

Most sellers do not have the time, the patience, or the M&A skills necessary to navigate this process. This is the best reason to hire an exceptional brokerage. A seller wants to be assured they will attain the maximum value for their CPA practice for sale in order to get the most cash at closing. If you are a seller considering engaging a broker, please bear in mind; not all brokers are created equally. 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. We can guarantee that the buyers in our massive buyer pool are not only actively looking to acquire an accounting firm; they are also willing to compete for your practice.

We have promoted and negotiated hundreds of deals, involving many millions of dollars in value for sole practitioners, small partnerships, and larger firms. Through our proven methods, we 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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