The accounting profession has certainly gone through an age of consolidation. No longer do we have a patchwork of various accounting practices and small partnerships operating across the profession. We now have an profession that revolves around the acquisition strategy, roll-up of firms, and complex capital structure. To participate in this new paradigm, it has become essential to know how to finance the accounting firm and acquire other firms’ client base.
Funding an accounting practice involves different considerations. Assets that can be leveraged to obtain the loan involve personnel and relationship management rather than machinery and physical facilities. Even though the cash flow of an accounting firm can be relatively predictable, it is anything but surefire. Underwriting requires lenders to assess not only the firm’s performance but also the likelihood of maintaining client base. If there is a good financing option, it needs to be considered carefully to find the best fit from the point of view of the firm’s capitalization and independence.
In this article, you will learn about sources of financing in the accounting industry, acquisition of a book of business, and underwriting criteria of lenders..
Why Accounting Firms Have Become a Financing Category
Accounting firms financed themselves in the 20th century by making partner draws, retaining earnings, and in rare cases, through ownership finance. They were considered a mystery to capital markets. However, in recent years, things have changed. They are now classified as a loan category, and capital for them is sourced from commercial banks and specialized lenders.
From a lender’s perspective, accounting firms check critical boxes:
- Recurring revenue: Most clients retain the same tax CPA, audit firm, or accounting advisor for years—even decades. This creates predictable, recurring cash flow, which is far more attractive than transaction-based revenue.
- Low capital requirements: Unlike manufacturing or technology, accounting firms do not require significant ongoing capital investment in equipment or infrastructure. Profitability can be achieved with lean operations.
- Defensive recession performance: Accounting, tax, and audit services remain in demand even during economic downturns. Firms providing these services often outperform other service businesses during recessions.
- Scalability: Multi-location firms, especially those with systems and processes, can acquire books of business and integrate them efficiently, creating economies of scale.
- Regulatory barriers to entry: The need for licenses, CPAs, and experienced staff creates natural barriers to competition, protecting market positions.
These characteristics have not gone unnoticed by lenders. Over the past five years, specialized lending programs for accounting firms have proliferated. SBA loans, conventional bank financing, equipment financing, and equity structures are now routinely deployed in this sector.
The Capital Stack: How Accounting Firm Acquisitions Are Actually Structured
A common misconception is that accounting firm financing comes from a single source. In reality, the vast majority of successful acquisitions use multiple financing layers. Understanding each component and how they interact is essential to optimizing the overall capital structure.
SBA 7(a) and 504 Loans: The Foundation
An SBA 7(a) loan is the most common method for accounting firm acquisitions. An SBA 7(a) loan can finance:
- The cost of acquiring a book of business
- Goodwill and other non-tangible items
- Systems and technology improvements
- Liquidity requirements needed to complete the purchase
An SBA 7(a) loan provides several benefits for an accounting firm acquisition:
- Money available from $250,000 to $5 million per transaction
- Down payments as low as 10%-15% of the total cost, allowing partners to keep cash on hand
- Large amortization periods, up to 10 years for acquisitions
- Security of fixed interest rates
An SBA 504 loan may be required in some circumstances where accounting firms are looking to make large capital expenditures or acquire a building with their book.
Conventional Bank Financing
Bank financing is still an attractive choice, especially for well-performing companies. Bank funding provides a number of benefits compared to SBA funding:
- Quick loan approval and fewer documents required
- More flexible terms and conditions
- Lower borrowing costs when banks are in good standing with the company
- Tailored loan covenants based on the risks involved in the acquisition
On the other hand, banks generally have higher equity contributions (20-30%) and more stringent financial requirements. Most companies will compare both types of funding before making their choice.
Seller Financing and Earnouts
In accounting firm acquisitions, seller financing is often the most creative and value-accretive component of the capital stack. When the selling partner or retiring principal carries back a note for a portion of the purchase price, several dynamics shift:
- Buyers reduce their upfront capital requirements, improving cash flow
- Sellers signal confidence in the firm’s ability to retain clients, reducing perceived risk
- Third-party lenders view seller notes as subordinated risk, often improving their approval confidence
- Earnouts—where a portion of the purchase price is contingent on client retention—align seller and buyer incentives
A typical acquisition structure in the $500,000 to $2 million range might look like: SBA 7(a) loan (50%), seller note (25%), and buyer equity (25%). This layering allows the buyer to acquire a significant book while preserving liquidity.
Debt Service Coverage Ratio (DSCR)
All financing decisions revolve around a single issue: Will the company be able to pay back the loan comfortably? The lenders consider the following factors:
- Past profitability of the acquiring company
- Earned margin from the acquisition of the book
- Integration costs and time taken to reach profitability
- Prudent estimations on client retention
The minimum required debt service coverage ratio by most SBA lenders is 1.25x, which means that for every $1.00 of debt service, the company makes $1.25 in profits. If your ratios do not meet this requirement, the lender will cut down the loan amount or increase the equity contribution.
Client Concentration and Retention Risk
In contrast to traditional forms of collateral, which might be tangible assets, the value of an accounting firm is its clients. Lenders take notice of concentration risk and retention risk:
- Does the book have any clients who constitute more than 10% of the yearly revenue? What is the retention risk in this case?
- Are there important relationships within this book that cannot be severed if the selling partner leaves? Would these clients leave along with the selling partner?
- What is the retention rate of the selling partner? Does the firm offer a sticky or transactional revenue stream?
- Are clients willing to migrate to the acquiring firm’s infrastructure and team?
The best acquisitions have a retention agreement whereby the selling partner continues in a professional relationship for a set amount of time, usually 2 to 3 years. Earnout payments are based on successfully retaining clients.
Acquiring Firm Financial Strength
Acquirers are analyzed by lenders very similar to any other borrower business:
- Historically audited or reviewed financial statements for three years
- Growth in profitability
- Good leverage (debt/EBITDA ratio generally not exceeding 3x)
- Excellent credit position and liquidity of the partners
- Succession planning and organization structure
If the company is in poor financial shape or is highly leveraged, getting the approval would be very hard despite the appealing nature of the acquired business book.
Management Capability and Systems
Does the acquiring firm have:
- Adequate staffing to absorb the new book without sacrificing service quality?
- Modern accounting software and platforms to integrate client data?
- A clear integration plan with timeline and milestones?
- Documented processes and quality control standards?
Firms that lack these assets are often viewed as execution risks. Lenders will ask tough questions about how the acquisition will be managed and what could go wrong. A well-documented integration plan significantly strengthens an application.
Common Financing Mistakes to Avoid
- Employing too much leverage in acquiring the firm: Although it is very tempting from an accounting standpoint to finance the deal at a rate of 80-90% of the purchase price, very little leeway will be left for errors. Even just 90% client retention instead of 95% predicted could create problems in debt coverage. In most scenarios, it would have been better to keep the leverage under 70-75%.
- Ignoring the costs related to integration after the acquisition: The amount of money that needs to be spent on integrating two businesses into one might surprise many people. Such expenditures can include retention bonuses, conversion of information technology systems, creation of a new corporate image, duplication of labor and salaries, and other issues.
- Inflating client retention numbers: There will always be a certain amount of customer turnover even if the transition process is handled correctly and there is high engagement from the seller. The buyer needs to plan for 5-10% client loss in the first year and test the numbers under realistic assumptions. Discounted Cash Flow Ratio must consider the realistic client retention assumption instead of optimistic ones.
- Neglecting proper definition of earn-outs: Conflicting definitions of earn-outs have been identified as the most frequent cause of disagreement between the buyer and the seller. Details regarding customer retention goals, sales volume targets, earn-out structure, and payout mechanism need to be spelled out clearly. Regular performance reporting can serve to prevent any misunderstanding later down the road.
- Underestimating the importance of seller financing: Seller notes play dual role of providing additional capital for the transaction and proving that the seller trusts his/her own business. In addition to improving financing options available to the buyer, seller notes provide better deal structuring flexibility, align seller incentives with buyer’s interests, and increase lender confidence.
Conclusion
There is consolidation going on in accounting industry and those companies who will be able to finance their consolidation properly by having appropriate strategy will prevail. It should not be an obstacle for the company, but rather a crucial factor for success in such situation.
ABOUT THE AUTHOR:
Christopher Cornella is Vice President of Business Development at US Professional Funding and US Medical Funding.
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