Acquiring an accounting practice is a strategic move that can expand your firm’s footprint and revenue potential. However, securing financing for such a purchase comes with unique challenges. As accounting is classed under Specialised Banking, lenders require specific financial information and conditions to support the deal.
Here’s what you need to know when buying an accounting firm.
Financial Requirements for Both Firms
Lenders will assess both the acquiring firm and the target firm to ensure they meet profitability and financial stability criteria. Key financial details required include:
- Three Years of Financials – Profit & Loss statements and Balance Sheets demonstrating profitability.
- Director Drawings & Super Drawings – Confirmation of these figures for both firms.
- Partnership Structure – Number of partners in the acquiring firm, the target firm, and post-acquisition.
- Projected Financials – An 18-month forecast outlining revenue and profitability expectations.
Understanding Maximum Lending Limits (MLL)
When using the firm’s book as security, the lender applies three maximum lending tests based on:
- Revenue
- Firm Valuation
- Sustainable Profits
The lowest of the three tests determines the lending limit. Additionally, the lender extends financing up to ideally 50% of the firm’s valuation (some can go as high as 65%), making careful financial assessment essential.
Additional Considerations
(these are generic and some of these can be negotiated with specific lenders)
Beyond financial data, lenders impose several conditions to mitigate risk:
- Panel Valuation – The buyer must cover the cost of a professional valuation for both firms.
- Revaluation Requirement – Firms must undergo a valuation every three years.
- Security & Guarantees – Most lenders require a General Security Agreement (GSA) and a Director Guarantee.
- Banking Arrangements – All trading accounts must be moved to the lenders institution before settlement.
- Loan Term Limitations – Maximum loan tenure permitted is three years for most mainstream lenders.
Conclusion
Buying an accounting practice can be a lucrative opportunity for firm owners looking to expand. However, navigating specialised banking requirements demands thorough financial preparation. By understanding these lending criteria, securing the right documentation, and planning for ongoing valuations, buyers can enhance their chances of a smooth acquisition process.
Whilst the above criteria is based on mainstream lenders, My Brokers Solutions also have some second and third tier lenders that can also lend to accountancy firms that are outside the above parameters.
For more information, please contact Matt Butcher on 0401 193 999 or [email protected].