Accounting Practice Loan
If you’re looking to venture out on your own as a tax agent or rapidly expand your accountancy, an accounting practice commercial loan can help you do just that.
Banks love accountants and will offer incredible deals just to get your business.
Getting a really competitive interest rate and borrowing the amount you need will come down to choosing the right commercial lender.
Getting approved for an accounting practice commercial loan.
Whether you’re buying an established accountancy or you want to start your own practice, submitting an accounting practice commercial loan application that details your strength as a borrower and your business plans are essential to getting approved.
So how much will a bank lend and how can a mortgage broker help you get approved?
How much can I borrow?
- Freehold: Borrow up to 70% of the purchase price (standard commercial property).
- Leasehold: Up to 60% of actual gross fee income or projected income.
- With wealth management arm attached: Up to 2.5x financial planning renewal income (earnings before interest and tax) multiple.
- Principal and interest: 10 years (fully paid off)
- Interest only: 3 years (to be fully paid off)
- At least 3 years professional experience.
- A practice business plan with profit forecasting may need to be provided.
Discover if you qualify for an accounting practice commercial loan!
Speak with one of our commercial loan specialists by calling 1300 889 743 or by completing our free assessment form today.
How do I get approved?
You’ll generally need to have at least 3 years experience as a principal of a similar-sized accountancy and be able to show financial evidence of networth consistent with your age and experience as a partner.
This evidence can come from your individual tax returns and bank statements showing regular credits in your account.
If you’re buying the practice as partnership, the lender will typically place a charge of debts as a floating charge and including a Deed of Accession.
As a company, there will typically be a fixed and floating charge and you’ll need to provide a director’s guarantee of the accounting practice commercial loan.
Key man risk insurance may need to be provided.
How do banks value practices?
As a basic requirement, the interest coverage ratio (ICR) should be more than 1.75 times earning before interest, tax, depreciation and amortization (EBITDA).
In addition to this:
- Net profit margin before partners salaries: More than 25%.
- Work in progress (WIP) days: Less than 70 days.
- Debtor days outstanding: Less than 70 days.
- Total WIP and debtor days (cash lock up): Less than 125 days.
- Debt Service Coverage Ratio (DSCR): 1.2:1.
- Client concentration: More than 10% of revenue.
- Average fees per partner: More than $500,000.
- Profit per partner: $140,000.
Apart from the above performance indicators, some lenders may also want to the know the stability of the practice that you’re going to buy, specifically, how they’ve been operating.
A practice that’s been running successfully for the past 10 years is a really good indicator and will give you a much better chance of getting approved.
Apart from the client concentration, they may also look what kind of clients make up the book to determine whether the book is heavy with “mum and dad” clients or whether there are high net worth, corporate or other specialised clients.
Banks recognise there is more revenue from specialised clients but they don’t have the same loyalty as a mum and dad and there may be a risk of a departure in the transition.
What’s the stability of the practice?
When buying an existing practice with a book of clients, the bank will want to know how long the vendor has been operating.
What if there is a financial planning arm attached?
Although the majority of accountancies simply offer the one tax and accounting service, some also have a wealth management or financial planning arm.
This can be a massive business opportunity but what does this mean for your accounting practice commercial loan application?
Generally speaking, the bank will separate the two income sources and run a multiple of EBITDA based on the financial planning arm revenue.
For example, if the financial planning arm was generating $200,000 in gross fee revenue, the bank may run a multiple of 2.5 and value this part of the business at $5,000,000.
How can we help?
Home Loan Experts has a team of dedicated commercial loan specialists with a number of years of experience working as the decision makers in the credit department of Australia’s largest banks and lenders.
They know exactly what the bank is looking for in an accounting practice commercial loan application and how do position the strengths of your financial situation so you can qualify for a higher Loan to Value Ratio (LVR) and significantly reduced commercial interest rates.
Find out how you can set up your loan so it best suits your needs as you grow your business by checking out the commercial loan features page.
With an extensive lending panel and credit expertise, our mortgage brokers are accounting practice commercial loan specialists.
Call us on 1300 889 743 or fill in our online assessment form today.
How to buy an accounting practice.
As far as businesses are concerned, accounting practices often wade through economic downturn quite well, with past year alone showing little decline in gross fees and profit levels.
By acquiring a practice, you can tap into the expertise of a long-time practitioners and administrative staff and immediate cash flow from the revenue of an existing client list as well as referrals.
So how do you know if you’re looking at a great buy?
What should I look for in a practice?
It’s not all about the gross fee revenue!
Look past the numbers and enlist the help of a business broker that specialises in accountancies to guide you.
A bank will generally not be as thorough with this process when assessing your accounting practice commercial loan application but you should!
If you’re a financial adviser looking to buy new books of business, you can check out the financial planning practice loan page, or if you’re looking to buy an insurance broking book of clients then you can check out the insurance broking business loan page.
The character of the vendors
What is the reputation like as well as that of the principals? Are there existing customer problems?
Reputation is everything when it comes to financial services providers.
You should ask for all of this information from the vendors prior to the sale, including current business financials.
Be wary of principals that refuse to be open with this information and ask them if you can observe how they run the day-to-day business.
Goodwill and the brand name of an accounting practice holds a strong value so be mindful of debts and legal claims from past clients that the vendor may have against them.
The client profile
Is the book made of 70% of small to medium business owners (SMEs), 20% PAYG and 10% audits?
What about the makeup of high net worth and corporate clients?
Yes, client concentration is important to look at from a risk perspective but it’s also good to calculate how much you’re earning from each client type.
Ideally, you should be looking for a good mix of clients.
SME fees, for instance, range from about $10,000 to $25,000 so this could be major win in expanding your business. That is, of course, if you can manage it properly.
Consider your own WIP days and the amount you normally charge for your services and how it fits in when servicing these new clients.
Existing clients may be used to getting invoiced every 2 months rather than the 1 month you bill your clients, for example.
In addition, older clients (reaching retirement age) , business owners and those that live several hours away from the practice premises tend to maintain greater loyalty to the existing principals in an acquisition situation.
They’re more than willing to jump ship if they feel like they’re being hard done by.
Consider your own skills
If you notice that the book is particularly heavy in high networth clients, you have to really consider whether you have the skills to service these clients.
Perhaps you need to upskill in this area or perhaps choose an accounting practice that better suits your own business model and the clients you target.
Work In Progress (WIP)
Don’t assume WIP clients come part and parcel with the deal.
There may contractual obligations in place with the vendor and the client meaning the client may or may not be transferred as part of the deal.
This can catch a lot of buyers out!
Accounting practice software and systems
It’s often the case the principals with 20-30 years of experience under their belt haven’t changed with the times.
They may have built up a large book of clients but trying to manage this book with outdated software could spell disaster.
Along with the software, the systems and checks that some practices have in place can be quite weak and may even need a complete overhaul.
For example, some practices have an ineffective Quality Assurance Review (QAR) program in place meaning you won’t be able to properly audit and monitor your compliance requirements.
This can give you some strength in negotiations and present a real opportunity to turn the practice around if you have a strong business plan in place.
Check the lease agreement
Unlike other types of commercial properties such as retail, you’ll want to avoid being locked in with a long lease just in case things don’t work with the practice you purchase.
Yes, it’s important to give yourself time to get the newly-expanded business in working order but you also don’t want to leave yourself in a situation where a significant proportion of book exits following the transaction.
This may leave you unable to pay the rent.
In saying that, it always makes sense to negotiate with the vendor and their landlord for at least two 5 year options.
If the lease agreement states that the vendor is required to restore and repair anything in the office prior to the lease ending, you should make this a requirement in the Heads of Agreement that these repairs be undertaken before you complete the purchase otherwise you’ll be left with these costs.
It’s important you have a solicitor present when negotiating the contract of sale and making the sale final.
Legal considerations and liabilities
If you’ve built up experience and strong client list at your firm and are now looking to take the leap in becoming a practice principal, it’s important to be aware of the legal requirements.
To run a practice as a principal you need to have a public practice certificate so contact your relevant accountancy association whether it’s CPA Australia, Chartered Accountants Australia or another government-certified industry body.
Licences such as this or those related to tax agents and investment advisors are not transferrable as part of the business sale.
How do I ensure an easy ownership transition?
There can be a lot of pain points for customers when a new principal takes over the accounting practice and the management of their tax affairs and business accounting.
You should consider implementing a transition phase between you and the outgoing principal.
In fact, getting approved for an accounting practice commercial loan may require you to highlight this as part of your business plan.
A transition period of 6-12 months is a good rule of thumb because it can give you a really good indication of how best to manage high payoff clients.
You may have to pay them a moderate salary but the expense will be worth it over the long term.
You can not only learn from a senior principal but you also have the opportunity to meet the top revenue makers for the business and introduce yourself. This is crucial to your future success.
Also consider any senior administration staff that have been with the practice for a while – they can add to the goodwill of the purchase so you should negotiate with them and the vendor about these key staffers staying on board at least for the medium term.
The other thing to consider is implementing a client retention and restraint-of-trade clause as part of the heads of agreement.
This is usually a guarantee of gross fees for at least 12 month (although, ideally you’d want to negotiate for 2 years) with retention money held over for the period, that is, you would withhold around 10-15 of the purchase price.
This retention clause may be higher depending on whether the accounting practice has a number of large clients that represent a concentration risk for the client book.
As explained previously, it’s important to enlist the help of an experienced solicitor who can help identify and list any debts owing or client disputes that are ongoing against the current owners.
This is a common problem often overlooked when buying an accounting practice.
Apply for an accounting practice commercial loan.
Speak with a special mortgage broker today
As a mortgage broker that specialises in commercial loans, we can help you secure the finance you need to buy an accountancy, establish a new practice and even help you cover working capital requirements.
You know tax but we’re accounting practice commercial loan experts!
Call us today on 1300 889 743 or complete our free assessment form and tell us about your situation.