Borrowing for growth: What buyers and sellers need to know about finance
Written Chris Sheedy of The Hard Word
For accountants seeking acquisition-led growth, and sellers looking for an acquirer, a deeper knowledge of the finance process makes everything easier.
For many owners of accounting firms, growth through acquisition can feel like a high-stakes move. After all, it requires capital, confidence and a certain appetite for risk. But according to broker Jason Kuan from Shern Advisory, the financial side of that equation is typically far less daunting than you might expect.
“A lot of accounting firm owners are actually pretty surprised that they can buy accounting books and accounting businesses with little to no money down, depending on their experience, the quality of the book, purchase price and the lender’s appetite.” he says.
That single insight can reshape the way many think about expansion.
It also raises another question – if finance is relatively easy to secure, what should buyers and sellers actually focus on?
Why lenders love accounting firms
Lending is all about the risk equation. Fortunately for accounting firm owners, in the eyes of lenders accounting businesses are very much at the lower end of the risk spectrum.
“They are just such secure businesses and professions, banks really like them,” Kuan says.
This confidence comes as a result of several factors, including predictable revenue, long and trusting client relationships and clear financial records. And unlike other sectors, professions and specialisations, accounting firms produce data that is transparent and verifiable.
“When you get a client, there’s an invoice. When there’s an expense, there’s an invoice. Your bottom line is your bottom line,” Kuan says. “It’s as simple and low-risk as that.”
As a result, traditional lenders including major banks are usually willing to fund acquisitions with minimal friction. In many cases, loans can be unsecured, so are not tied to personal assets such as property. This can help to mitigate risk for the borrower.
That has two noticeable implications for accounting firm owners – both buyers and sellers. First, finance is broadly and readily available. Second, that finance tends to be packaged around relatively competitive terms.
“Loan term is typically five to 10 years if secured just against the book,” Kuan says. “If the borrower adds residential security, the rate will reduce and the term can extend to 30 years principal and interest repayments. Interest-only options are also available for five years and can be rolled over subject to credit assessment at renewal.”
Lenders may ask for a general security agreement (GSA) over the business, director’s guarantees and/or PPSR registrations over the book and goodwill.
“Interest rates will lean towards the lower end of the scale, as accountants are usually placed alongside other trusted professions like doctors and lawyers,” he says.
The key takeaway for buyers is that package flexibility is on the table. Rather than focusing on a single “standard” model, accountants could expect terms to be tailored to their circumstances.
What are lenders looking for?
Kuan stresses that not every deal is automatically approved. Lenders will always apply a disciplined lens to every case.
However, from the buyer’s perspective, the process is usually fairly straightforward “as long as you’ve got a track record and you’re buying into a good business,” Kuan says.
Lenders will usually assess:
the buyer’s professional experience and revenue/income history,
the financial performance of the target firm, and
the combined strength of the merged entity.
Valuation plays a central role, with banks relying on independent or in-house valuers to determine whether the purchase price is justified.
“They look at the book, figure out the value and will just lend against that,” Kuan says. “So, as long as you’re not overpaying, it’s pretty straightforward.”
Are alternative lenders in the picture?
As traditional lenders are keen to deal with accountants for the acquisition of accounting firms, they tend to be the first and often best port of call for buyers, Kuan says.
However, alternative or “second tier” providers can step in when deals fall outside of the usual parameters.
“The traditional lenders may have certain parameters that are more rigid,” Kuan says. “The alternatives will also be open to a common sense conversation but are also more commercially minded.”
This flexibility can be valuable in situations where:
the buyer has a shorter track record,
the deal structure is unconventional, and/or
the business has unique characteristics.
The trade-off, however, is cost.
“You do pay a slightly higher rate,” he says. “But if the traditional lenders won’t do it, the alternatives may be worth considering.”
The strategic role of debt for buyers and sellers
“One of the quickest way to scale is to leverage other people’s money to grow your book through acquisition,” Kuan says.
Accountants know this, as they often advise clients around such topics. However, for those at the more conservative end of the risk scale, taking on debt to find greater success might seem counter-intuitive.
That’s where due diligence comes in, says transaction advisor Kev Ryan, a Lead Advisor at SELLERS.
“In the context of a stable, cash-generating business, debt can accelerate expansion without requiring large, upfront capital,” Ryan says.
“All the seller needs to do is ensure the books clearly demonstrate the acquired revenue stream is stable and profitable enough that a lender can see that the business can effectively service the loan.”
That dynamic, of borrowing to buy a healthy firm and having that firm’s success comfortably cover the repayments, is what makes acquisition-led growth particularly attractive in accounting.
Kuan says the fundamentals, once again, are relatively simple – especially for accountants.
“Make the numbers clear and make sure they reflect actual spending as much as possible,” he says.
That includes:
maintaining clean, compliant financial statements,
avoiding excessive expenses, and
ensuring the balance sheet reflects a healthy level of equity.
Operational independence is another key factor. Lenders and buyers look favourably on businesses that can run without the owner.
“Most accounting firms already meet these criteria,” Kuan says. “Eight out of 10 accounting books that I’ve seen, they’re all strong like that.”
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