If you’re looking for an investment opportunity, then maybe you’d like to look into tax or CPA practices. These business models often succeed, assuming that the owner is running them properly. That’s because these are services that people need, so the customer base is always there.
However, as you might already know, if you’re going to invest in a business or buy one, part of doing your due diligence is examining the deal from all angles. That’s a little tricky when it comes to CPA and tax practices.
Let’s look at a few variables to help you determine whether you want to proceed.
When you’re calculating the valuation of a tax or CPA practice before investing, you’re going to want to think about the multiple before you dig any deeper. The multiple is:
- Revenue multiples
- A way to determine how much the firm or CPA practice is worth
The way investors calculate that ever-critical multiple is by looking at the firm’s size and nature. You’ll also need to examine how profitable it is and could be.
That’s not all, though: you might have to look at its location if you’re talking about a brick-and-mortar store. Also, you’ll need to look at real or perceived competition from other buyers.
The most vital aspect of all of this is that a CPA practice or accounting firm is not something on which the market can place a definitive value. Value in these instances is in the beholder’s eye.
If you’re going to invest in a CPA practice or accounting firm, then probably the only reason to do that is if you’ve seen that it can make a profit. It’s not likely you’ll invest if that practice:
- Is in a poor location
- Is insolvent
- Has a shoddy business model
These sorts of businesses don’t function well with owners who want to reinvent the wheel. Because accounting firms and CPA practices must operate according to rigid standards and with lots of oversight, you don’t want to hear about grandiose plans from whoever’s in charge.
If you see that this practice is profitable and should continue to be so, you’ll likely be more inclined to invest in it. If that’s not the case, you’ll probably want to find something else to do with your money.
Also, you need to look at how much the owner or operator wants you to commit. If your cash infusion is the only thing that will keep this particular business afloat, they might be desperate to secure your funding.
If so, they may try to fudge the numbers or inflate them in some way. Watch out for that, and check financial statements with an accountant very carefully.
If they only need a minor investment from you, you’ll probably be more comfortable committing. You’ll also likely be more willing to invest if others are doing so at the same time.
Your Involvement Level
You should also think about how much you’re going to become involved in the CPA practice or accounting firm’s day-to-day operation, if at all. Most investors simply put up the money and then hash out a revenue-sharing strategy with the owner or operator.
However, maybe the owner feels like they need more from you, like feedback on making the business profitable. If so, understand that before you commit. If you’re okay with that involvement level, this sort of thing doesn’t have to deter you.
If all you plan to do is sink your money into this venture and then essentially walk away from it, you need to make sure that the owner or operator knows that. If you have no accounting experience and aren’t a CPA, it’s unreasonable to expect your direct involvement.
One more thing you’ll want to look at is if you wish to invest in this practice or firm for a finite period. You might set up a contract stipulating that you’re going to invest in it for three, five, or seven years.
If so, you might want to get back a certain amount during that time. If you don’t see a particular return rate on the principal, then that might nullify the rest of the contract term.
Again, it’s by no means a poor idea to invest in a CPA practice or accounting firm because of how many people use them. Just be sure to come up with a contract that suits both you and the owner before you both sign it.