For many years, accountants and bankers treated each other primarily as fellow professionals, part of a cadre of advisors who worked together to see that their clients were well-looked-after, and who swapped referrals to help keep each other in business.
"Banker breakfasts" were a common business development tool for CPAs, and any good local banker would have a few trusted accountants in his Rolodex to recommend to small (and not-so-small) businesses that might come in for a loan or to set up a commercial account.
But strangely enough, banks and accountants didn't do much traditional banking business, in the old-fashioned form of taking out business loans. Granted, CPA firms don't have the same capital needs as, say, a heavy manufacturer or a real estate developer, but they do need money for partner buy-ins and buy-outs, and mergers and acquisitions, as well as for office space and equipment - and they're also excellent risks, with a culture of integrity, a sound business model and a higher level of business-savvy than most small businesses.
Despite all that, accountants and bankers never really pushed their banking relationship that far - until recently.
Over the past few years, banks in need of creditworthy customers and accountants in need of greater amounts of capital have begun to see each other as more than just referral partners. The financial woes following the economic collapse of 2008 had many banks concerned about the quality of their loans, and looking to make new, safer ones. At the same time, partners and others at accounting firms have been discovering a new appetite for capital, as the pace of ownership turnover in the profession accelerated, and firms need money to buy out old partners, to help new ones buy in, and to acquire other practices in an M&A market that has exploded. That, and the growing importance of spending on technology, has got them thinking differently about their borrowing.
INTO THE MARKET
Few have been more at the forefront of the shift in the relationship than Bank of America. Its Practice Solutions unit dove into the market in 2012, with core product line for helping accountants with acquisition loans, debt consolidation refinancing, and partnership capital buy-ins, but it also offers financing for practice sales, partnership buy-outs, office improvements and expansion, equipment financing, lines of credit, and commercial real estate, and continues to develop new products. It is now a preferred affinity lender of the American Institute of CPAs, and is in talks about similar endorsements from a number of major state societies, with the eventual goal of working with all of them.
We caught up recently with some of the leaders of the Practice Solutions team to get their take on what the CPA market looks like, and how it's changing. The first thing they noted was that it's growing, with a significant increase in lending and demand for capital over the past year and a half. It has worked with between 150 and 250 firms in that period, and looked at close to 5,000.
"Eighteen months ago, when we entered the accounting sector, our maximum loan amount was $750,000. Now, because of the demand, our loan amounts have increased to $2,000,000, with some loans even topping that amount," said Joe DiNicola, line of business executive for Practice Solutions. "We have also seen a 100 percent year-to-date growth in closed transactions from 2012 to 2013, and we expect that trend to continue as we enter the fourth quarter of 2013."
Some of this growth reflects accounting firms bouncing back from the economic downturn, but some also reflects a traditional thirst for capital.
"There are not many banks that are loaning money to accounting firms, mainly because of the nature of the practice itself," said Bruce Warren, the BoA vice president who handles the Practice Solutions unit's CPA division for the Midwest. He noted that in the past, CPA firms were often limited to lenders providing Small Business Administration loans, which could be difficult to acquire, or seller financing. "We understand that, with CPA practices, the collateral is goodwill and cash flow. SBA loans typically require the borrower to have their loans collateralized with real property, often have high closing costs, and can take months to obtain an approval and fund. The other problem with SBA loans is that CPAs are lumped into a general category with manufacturers, restaurants, etc., and thus not catered to as the accounting profession."
"Seller financing has been used in the past, in part because of how hard it has been to obtain financing through the SBA or local banks because of the lack of knowledge about the goodwill and cash flow of a practice," Warren added. "Seller financing has often put all of the risk associated with a merger or acquisition on the seller through the transition process because the buyer doesn't have to put up any capital at closing."
That could often be an issue in mergers - and mergers have been one of the primary drivers of the profession in general, and of the new relationship with banks in particular.
TRENDS IN M&A
Bank of America has a ringside seat to the ongoing bout of merger mania that's sweeping the profession as the Baby Boomers look to retire, and ambitious firms look to get bigger in a tough economic environment.
"Growing organically is very difficult, so many firms believe the only way to grow a practice right now is through an acquisition or merger," said Justin Schafer, the vice president in charge of BoA's East Coast CPA division. With so many of Practice Solutions' customers going through mergers or acquisitions, the group has developed deep expertise in all aspects of firm M&A, including how to make a combination work.
"A buyer should look for some commonalities between their current firm and the firm they are looking to acquire," advised Schafer. "For example, does the target firm have the same mix of tax, audit and bookkeeping work as their current practice or are they looking to acquire a practice with a different product offering so they can cross-sell their current services? A buyer should ask if the cultures of the firms merging or being acquired match. Do they have the same dress code, office hours, staff schedules etc.? Can the buyer's staff handle an increase in workload without a significant cost increase? Does the seller want certain employees to continue working in the practice? What's the term of the lease? What is the ability to opt out or renew? What technology platform does each firm use and what is the capacity to move forward without a substantial cost increase or service disruption?"
While it's useful to know what to look for in a potential partner, it's also important to know what they're looking for in you, so Wally Hayes, the vice president in charge of the CPA division for the West Coast, offered some details on what makes an accounting firm an attractive prospect for a loan. "The cash flow from the firm needs to be able to cover the personal debt of the borrower and their loan with us," Hayes explained. "In order to have a positive personal cash flow, a borrower typically needs to have a credit score above 680, revolving debt balances less than $25,000, and 10 percent of their loan request in liquidity for a down payment and/or working capital post-acquisition. In short, we need borrowers to live within their means, have a solid retirement plan in place and show an overall positive personal cash flow." Those have always been the kinds of solid characteristics that bankers and CPAs looked for in their shared clients, but now both sides are waking up to the reality that they are precisely the qualities that characterize the average CPA firm - and that's leading to a very different relationship.
