One of the fastest ways to grow your accounting firm is to merge with or acquire another company. If the other company is already set up and has a list of clients, you’ll be able to make both companies operate more efficiently together. On the other hand, selling your accounting firm is one of the fastest ways to be rewarded for setting up a successful business. Whether you’re looking to buy or sell an accounting firm, there are a few due diligence tasks you should be prepared to address.

How Will This Impact Staff?

Your accounting firm can’t exist without staff. Beyond the accountants, auditors, and tax preparers, this includes the administrative and managerial staff. When buying an accounting firm, get hard numbers on the current staff level, additional hires being planned in the immediate future, and your options regarding the employees. Target key employees of the existing firm you’re buying, as you want to make sure their transition to the merged firm goes well. You should also know if any employees are under covenants not to compete or non-solicitation agreements, as you might have to terminate these agreements to bring them onto your staff.

Is the Client List Diversified?

If you’re buying an accounting firm, you’re really buying the rights to serve certain customers. These customers might’ve agreed to contracts where you get to prepare their tax returns for the next five years. As you scope out the accounting firm, take note of the risk present in the customer list. Is one customer responsible for most of the company’s revenue? Is there a clearly defined top tier of clients? Don’t just look at the names; study what the number and size of the customers means. If you happen to be on the selling side of the table, be prepared to explain your key customer relationships. This includes how long you’ve provided services for them, how much money they’ve paid you, and what services you’ve done for them.

Will Customers Be Loyal?

Whenever there is major change within a business, it’s normal to expect the customers to change as well. Some customers won’t like the idea of having a new management team controlling their old accounting firm. Other customers may have simply developed a strong relationship with previous staff and have decided to take their needs to companies that brought in the old employees. Part of the accounting firm acquisition process is getting a sense of how deep customers are tied to the company. If they love the firm, consider keeping the logo. If they’re not, you’ll have more options.

What Does Cash Look Like?

You get a bunch of assets when buying an accounting firm, including customer lists, contracts, and long-term agreements. You also get whatever physical assets the old firm owned as well as the rights to future assets. One of the first numbers to crunch relates to cash flow. What sorts of payments will be collected? How many clients will be paying in the next 30 days? What percent of the accounts receivable balance relates to expired receivables? The more cash that comes in, the better shape your company will be. You’re better off having hard evidence of your company’s cash if you’re looking to sell. Always be prepared to tie the bank statement to the trial balance. Maintain bank reconciliation reports, as prospective buyers will ask to see them. Document any cash on hand and what the process is to use it.

How Can You Balance Work Papers and Confidentially?

If you’ve bought an accounting firm, you also purchase its history, and this includes the backup to all the work that’s been done. It’s now your responsibility to take on, organize, and manage the work papers from old audits and tax preparations even if they happened before you bought the accounting firm. It’s important to get an understanding of how the old accounting firm operated and its documentation practices.

If you’re looking to unload your accounting firm, don’t be alarmed if you’re asked to show some work papers. Potential buyers are just trying to get a sense of how things were done at your company. If you don’t feel comfortable showing the work you’ve done, consider asking prospective buyers to sign nondisclosure agreements. You can also show work papers that don’t contain any proprietary information; as long as all of the information is vague, the buyer can’t tell who the information is about so your clients stay protected.

What Legacy Items Should I Keep?

The goal of your sale is to keep the change to a minimum and transition operations as smoothly as possible. Understand what the accounting firm’s billable rates were and how they compare to yours. It’s not fair (or a good business practice) to buy a firm and have to change what everyone was paying for services. When pursuing the sale of a firm, don’t be nervous to share what you charge clients. As long as your rates are honest, they’ll be used to create the true valuation of what your accounting firm is worth.

The purchase or sale of an accounting firm is exciting. Whether you’re merging your current firm with another or off to enjoy retirement after the sale of your company, it’s important to go about the process wisely. Ask yourself important, strategic questions to make sure you’re looking at the entire picture and to make the best decision regarding what to do with an accounting firm.