Ryan Bakke bought a $2.5 million accounting firm with 330 clients. He owns Tax Strategy 365, a real estate CPA firm that we scaled from zero to $3 million a year together. When it came time to grow beyond that, Ryan did the math and realized acquiring was the smarter play.

I sat down with him to walk through the entire process. How he found the deal, what he looked for in due diligence, how the deal was structured, and what he would do differently next time.

Why Buy Instead of Growing Organically

Ryan had a conversation about this a couple years ago where he said he would never buy an accounting firm. He would just do marketing. But the math changed his mind.

Going from $3 million to $6 million organically would have required about $450,000 to $500,000 in ad spend, another $100,000 to $120,000 in sales commissions, and a roughly 50% increase in staff to handle the doubled client base. Total cost: about a million dollars. Timeline: a year and a half to two years.

Buying a firm was cheaper and faster. That is what made him pull the trigger.

How He Found the Deal

This was not a brokered deal found on a marketplace. Ryan had a student in one of his CPA coaching programs who was doing contract work for a firm that had just lost a key CPA. They were paying her a significant hourly rate to review returns. Ryan asked more questions and discovered it was a $2.5 million firm with 300 clients, primarily doctors, high net worth individuals, and real estate investors in Los Angeles.

The key takeaway here: the best acquisition deals tend to be off-market. When a broker is involved, expect to pay more, wait longer, and have less flexibility on terms. Brokers charge about 15% of the sale price and claim to represent both sides, which Ryan compared to having one lawyer represent both buyer and seller.

What to Look For in Due Diligence

Ryan focused on several key metrics when evaluating this firm.

First, the ratio of business returns to personal returns. He would not buy a firm unless at least 50% of returns were business returns. Clients who file both business and individual returns are much stickier. In his acquisition, churn on business-owner clients is 5% or less, while clients with only 1040s are responsible for most of the 16% overall churn.

Second, average revenue per client. This firm averaged about $8,200 per client across 300 clients. That is a healthy number.

Third, recurring versus reoccurring revenue. Recurring revenue hits your account every month like clockwork. Reoccurring revenue is revenue you expect because the client has been around for years, but the timing is unpredictable. The more recurring revenue in the deal, the better, and you will pay a premium for it.

Fourth, and this is the one Ryan wishes he had dug deeper on, the seasonality of cash flows. The P&L showed total annual revenue, but it did not show when that revenue was collected. This firm babied their clients, letting them extend and file late, which meant 50 to 60 percent of tax work was being delivered in the last three months of the year. That created a serious cash flow crunch that Ryan had to front-load costs for.

The Deal Structure: Earnout vs. Seller Financing

There was no fixed sale price in this contract. Instead, Ryan agreed to pay a certain percentage of the revenue collected from the acquired client list over four years. This is called an earnout.

With a traditional seller finance note, Ryan would have paid $2.5 million plus interest, regardless of how many clients stayed. With the earnout structure, because of natural churn, the total payout is projected to be about $1.4 million over four years.

The earnout also aligns incentives. The seller is motivated to help retain clients because their payout depends on it. With seller financing, the seller gets paid no matter what, so there is no incentive to stick around and help with the transition.

Ryan presented the seller with multiple options: an earnout deal projected to pay more over time, or a lump-sum buyout for less money upfront. The seller gets to choose which structure works better for their situation.

Client List Purchase, Not a Company Purchase

Ryan did not buy stock in the company. He did not buy the office or the furniture. He did not absorb any liabilities or accounts receivable. He bought the client list.

This approach lets you merge the acquired clients into your existing firm, your existing systems, your existing processes. And by implementing better systems, Ryan expects to cut costs by $200,000 to $250,000, which at a 5x multiple also boosts the company’s value by about a million dollars.

For the seller, selling as goodwill means the proceeds are taxed at capital gains rates instead of ordinary income, which is a significant tax advantage.

The Transition and Retention

Transferring client files requires consent from every client. Ryan’s team used a multi-channel approach. They sent handwritten emails announcing the ownership change, mailed paper flyers to client addresses, and Ryan flew in personally to meet clients who were on the fence.

The email campaign alone got about 60 to 65% of clients to confirm they were staying. Phone calls picked up another 10 to 15%, bringing total retention to 80 to 85%.

The Bigger Play: Roll-Up Strategy

Private equity is not interested in accounting firms unless EBITDA is over $2 million to $2.5 million, which means gross revenue needs to be around $10 to $11 million. That creates an opportunity for smaller operators.

Buy a couple of $2 to $3 million firms. Systemize them. Put them on the same processes, employees, and common ownership. Individually, a $3 million firm might sell for $4 million. But put three of them together under common control at $9 million in revenue, and you are going to sell for significantly more than $12 million because they are worth more together.

Ryan put it perfectly: it is just like Planet of the Apes. One stick alone, easy to snap. Bundle them all together, and you cannot break them.

If you are an accounting firm owner thinking about acquisitions, start by growing organically to maybe 50 to 100 clients first. Nail your processes and systems. Then go buy a client list and fix what they do not have. That is where the real value creation happens.

Frequently Asked Questions

Is it cheaper to buy an accounting firm or grow one organically?

In many cases, acquiring is both cheaper and faster. Ryan calculated that doubling his firm organically from $3M to $6M would have cost over a million dollars in ads, sales commissions, and new staff, plus 18 to 24 months of ramp-up time. Buying a $2.5M firm was less expensive and the deal closed in a matter of months.

What should I look for in due diligence when buying a CPA firm?

Focus on the ratio of business returns to personal returns (at least 50% business), average revenue per client, recurring versus reoccurring revenue, and the seasonality of cash flows broken out by month. Also review work papers for quality and, if possible, interview employees one-on-one before closing. The biggest thing Ryan wishes he had analyzed more deeply was when the cash was actually being collected throughout the year.

What is the difference between an earnout and seller financing when buying an accounting firm?

Seller financing is a fixed loan. You pay the full purchase price plus interest no matter how many clients stay. An earnout ties the payout to actual revenue collected from the client list over a set period. You will almost always pay less with an earnout because natural client churn reduces the total owed. It also aligns incentives since the seller only gets paid when clients are retained.

How much revenue should an accounting firm have before I consider buying it?

Ryan recommends targeting firms with at least seven figures in revenue. Firms under $500K are essentially a high-paying job, not a real business. At the million-dollar-plus level, you can afford to hire admin, preparers, reviewers, and bookkeepers while still netting $400K to $500K personally without doing all the work yourself.