Episode 94 | How To Buy Tax Practices For Pennies On The Dollar With Dominique Molina

Want to know how you can buy tax practices for pennies on the dollar? This is the episode for you! Today’s guest is Dominique Molina, the co-founder and President of the American Institute of Certified Tax Coaches. In this episode, she joins host Michelle Weinstein to share tips and tricks on buying tax practices at better rates and reducing your clients while increasing revenue. It’s all about having that abundance mindset. Don’t miss out on practical knowledge that will help you earn more and work less by tuning in to this episode.

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How To Buy Tax Practices For Pennies On The Dollar With Dominique Molina

We have a special guest. Our special guest is Dominique Molina, who is a CPA, MST, and CTS. She is the Co-Founder and President of the American Institute of Certified Tax Planners. She is the driving force and visionary behind this San Diego nonprofit that helps tax professionals approach tax planning, realizing that many tax professionals were missing government tax breaks that could save their clients millions of dollars.

She has created an elite network of tax pros, CPAs, EAs, and tax attorneys who are trained to help their clients proactively implement tax strategies and rescue their clients out of thousands of dollars in wasted tax. She has successfully licensed over 1,000 tax pros as certified tax planners across the country. She is also an accomplished keynote speaker, teacher, six-time bestselling author, and mentor to tax professionals across the US. She routinely speaks for Surgent CPE and AICPA Women’s Leadership Summit, among other leading professional groups.

Before we welcome Dominique to the show, as a tax and accounting professional, I imagine you are sick of grinding fourteen hours a day, sacrificing your time with family and friends, and postponing vacations that are way long overdue. You are completely exhausted from being on the financial roller coaster of discounting your fees. You end up resenting the work that you do for them and feeling like a commodity.

None of this is your fault. Nobody is training you on how to fix these problems and connect the dots. My team and I have set aside some time to speak to you personally about how you can apply some new strategies to your firm to put all of that to rest. Head on over to TheAbundantCall.com to book your call with us. Whatever your biggest challenges are, we have seen them, and know how to overcome them.

We’ll get on the phone for about 45 minutes. We’ll get crystal clear on where you’re at right now with your firm and what’s keeping you stuck. We’ll also identify where you want to be with your firm and in your life. You can get paid first, never discount, avoid all those pitfalls along the way and save a ton of money in the process. Head on over to TheAbundantCall.com, and we look forward to speaking with you soon. Let’s welcome Dominique to the show. Welcome to the show, Dominique.

Tax Practices: You’re buying a revenue stream when you purchase a tax practice.

Thanks for having me.

Thank you so much for being back with us here on the show. We are talking about your tips and tricks on how to buy tax practices for pennies on the dollar and hopefully turn some of those clients into high-paying clients. I’ve heard that’s a big challenge from a lot of firm owners who want to start their firms. They might be in corporate with a side hustle, but they need clients.

They’re like, “Let me buy up this tax practice. I have 700 clients that only want to pay me $100 each.” I would love to dive in with you on that. Before we start, for those of you that might not be familiar with who you are, do you want to share real quick who you are? Even though I did your bio, it’s always better to come from you as the guest.

I love being able to connect with my fellow tax professionals. We are a unique breed of individuals. Anytime I get to connect, even in this type of environment, it’s exciting for me because it doesn’t happen that often. I don’t often walk into a cocktail party and find somebody else there that’s like me. I’ve been in the tax business since fifteen years old, when I did my very first tax return for myself. I wanted to know why I was not keeping everything that I was making.

I loved the puzzle of that all. I loved problem-solving and made it a career choice for myself. I’ve been helping small business owners for several years with an emphasis specifically on advanced tax reduction. I’ve got a graduate degree from law school in that topic. My specialty is helping people pay a lot less in tax legally. That’s what I’m going to talk about now. The secret to getting firms for pennies on the dollar is being able to come in and immediately increase the value of those clients. I found that tax reduction is a great way to do that.

Tax reduction and how to do it legally is your forte. We’re talking about how to buy tax practices for pennies on the dollar so other firm owners can start a practice. Maybe they don’t have any clients. They don’t want to dive into marketing, and rather buy something up. What would be that first step for them? Give us all the goods, all your tips, and tricks, especially on how to do it for not that much money. We’ll get into what you do with the clients and how you convert them into higher-paying clients. You can help them save taxes legally, do tax reduction, and more of that high-value service stuff that we’ve talked about in previous episodes.

Buying a business is one of the fastest ways to build wealth and grow your business, not only in any industry. When we specifically look at service-based industries, you analyze what you are buying. You’re buying a revenue stream when you purchase a tax practice. It’s a great way to get started and enhance the valuation of your firm. Let’s say that you’re approaching or you’re building your exit strategy, and you’re not quite where you want your valuation to be. Buying an existing tax practice is a fast way to add that value to your practice.

I love a good deal, and I know you like a good deal. That’s what this is all about. It’s about turning this into a good deal. Typically, tax practices are valued based on the top line revenue. We look at what is that income that’s coming into the practice. There’s some multiple. There’s a multiplier. Anywhere from 0.8% of one year’s revenues all the way up to about 1.3% is what we see.

COVID-19 has started a recession in the US. That is the best time to acquire companies because prices drop, multiples drop, buyers tend to disappear, and nervous sellers scramble to sell. It’s an opportune time to not only see if we can get that multiple to drop so that the price of getting the business is cheaper. It’s also about how you can maybe even work a deal for yourself where there’s no money down. You have no cash out of pocket coming into it.

Because of the challenges we’ve seen in the last several years, this is the ideal time. When we look throughout history, multiples tend to be lower when we have the recession start and start to increase steadily thereafter. We’re in the middle of a time where it’s an important positioning time in picking up practices like this.

Tax Practices: Your goal is to acquire the practice that will end up being pennies on the dollar because you can charge triple the fees.

Let’s say you even get it for a low multiple. We still have to consider cash out of pocket, how much to negotiate that, and what happens if you don’t have the cash. The other factor is how you can make it an even better deal over time by increasing the value of those clients. Let’s say that you’re able to come in and charge three times what the previous accountant charged. All of a sudden, my multiplier plunged because I’ve enhanced that first-year revenue to a much bigger number. Relatively speaking, I’ve gotten that purchase price for a good discount.

This is my favorite way to do this. It’s hundreds of billions of dollars opportunity because there are lots of people. When we look at the size of firms among sole practitioners and smaller firms, over 70% are over the age of 50. That’s an important factor because the last few years have been rough. There are a lot of accountants that are leaving like, “I’m out. I can’t deal with this anymore.”

If you’re curious about this, there’s a great article that’s in CPA Practice Advisor Magazine. It’s called The State of the Accounting Firms Succession. It talks about CPAs that are retiring in the next decade and what practices are available. As a result of these conditions, sellers will likely receive a lot less than expected, but here’s the thing. When you’re the buyer, that’s a good thing. We want everything to be on sale.

We do, in some instances, not always. Buying a tax practice for pennies on the dollar, getting it at a discount or a sale price is in your best interest, especially if the firm owner is over 50 and wants out. You’re in a power position. What do you think the three different scenarios are for an acquisition of a tax practice based on the different variations on ways that they can make an offer? If someone is reading and maybe they don’t want to spend the marketing dollars to grow from scratch but will contact one of these firm owners that are on their way out or nearing burnout and making these shifts. What deal structures have you seen that have been good and for a great deal?

I’ve seen accountants come in and get practices for $0.10 on the dollar. You’re looking for certain circumstances. There are lots of benefits to the issue of why buy versus a startup. There’s less risk. You’ve got better financing options. You have instant customers, profits, sales, systems, and employees, in some case cases, depending on the type of business that you find. The best deals will not be found through a business broker.

In this market that I’m describing, you have to become a deal detective. It’s about finding ideal acquisition targets. We’re looking for certain situations that present themselves as ideal for us. The first thing you want to do is look at who is ideal for your offering. To make this be pennies on the dollar, what I’m talking about and suggesting is what situation is it possible in where you can instantly triple the fees that are being charged. That makes a lot of accountants nervous.

I did a talk. They’re like, “How do you raise fees to 300% or 400%? Sell me on that idea.” I’m like, “I will. No problem.”

If you’ve just acquired the firm, it makes a lot of people nervous. The focus when you first acquire a practice tends to be on keeping those clients. “What do I have to do to retain them?” I want to help you see a different goal and think about a different outcome. If you thought of this business purchase as a way to grow your ideal company, would that be a different outcome than simply buying a practice and retaining as many clients as possible? There are two different outcomes in these scenarios.

If what we’re trying to do is build the ideal company, we’re focused on everything we have to do to make that true. We can’t worry about the people we do not retain. It takes a strong stomach for these types of acquisitions because you’re not going to retain 100% of the clients, but that’s not your goal. Your goal is to acquire the practice that will end up being pennies on the dollar because you can charge triple the fees.

The first step is to decide what that client profile looks like. In the tax planning world, we focus on businesses. When I looked at sample ads, I looked at some open listings here in California. When I look at what the listings say, I’m looking at the number of business returns versus the number of individual returns. I’m looking at the number of built-keeping clients, for example. That’s going to be the most important thing to me as a buyer because I want to make sure that there’s alignment in the types of clients that I’m acquiring.

Tax Practices: Practitioners who have this scarcity mindset are so focused on preventing people from leaving that they’re willing to take less in fees, but that’s not our goal. Our goal is to get more in fees.

That’s building the ideal company versus thinking about the clients and how many you’re going to retain.

Can you see where there’s a different mindset here? In that situation, we’ve got a scarcity mindset. What can I do to keep these people from leaving? What tends to happen when I work with practitioners who have this scarcity mindset is they’re focused on preventing people from leaving. They’re willing to take less in fees, but that’s not our goal here. Our goal is to get more in fees. In that mindset, we’re thinking about this from an abundance and opportunity mindset. We’re looking and saying, “I acknowledge that this isn’t going to be a good fit for everybody in this practice, but I’m also not looking to retain 100% of those clients either. I’m looking for high-value clients in this.

I want to share a story because I have a client who’s like this. We’ll call her Susie for now, but she bought practices. There were 550 to 1,040 clients. She increased the revenue to what we said. It would have been about a $277,000 annual increase. A few months later, once she figured out what she was left with, she added up all of the paid people who she got money from on the returns versus the ones that she declined or they left. She gained around $12,000 in profitability and decreased her volume by 50%, and still was in the positive with half the amount of work. Her goal was to have about a 50% to 70% retention.

In total, in the end, when I get her numbers, there’ll be a 70% retention but still an increase in revenue. She stayed at the same $77,000 of revenue plus the extra $12,000 but decreased the volume by 50%. This is someone who was terrified of seeing the volume go away. She wasn’t thinking about, “Let’s focus on what the company looks like, the bookkeeping clients, and the valuable type of clientele that we want to keep here.”

Let’s go back to looking at the number and breakdown of the type of clients. One of the things you’re going to want to look at is the number of individual returns versus the number of business tax returns and what those average fees are. Low average fees may be an indicator that you’ve got low-income clients, but not always. When you’re going through this process, one of the things that you’re going to want to do is get a sense for, “What are the average incomes of your clients?” That’s something that you can easily obtain by doing database reports, looking at your tax prep software, or running some filtered reports by AGI or by net income for the business.

Let’s say my goal is to end up getting this purchase for pennies on the dollar. If I’m looking at a listing that has 519 individual clients and 26 business clients, that’s not a good practice for me. I would be saddling myself with low revenues to service the individual returns. There wouldn’t be a lot of opportunity for planning. You want to get that client mix down. That’s going to be the most important thing.

Keep in mind that the best deals are not going to be found through a business broker. You can train and learn by looking at the listings that are there. You want to start to get a feel for what this client mix is, what the average fees are, and how people are pricing those. That’s going to help you become that deal detective. Finding those ideal targets is about networking and building relationships.

You can join accounting groups or go to conferences. You can ask existing networking groups that you may belong to, like BNI. You can ask your suppliers or your vendors. If you have with ADP, Paychex, a tax software salesperson, or a representative, those can be all great ways to start to ask around, “Is there anybody that you know of that’s thinking about leaving?”

You want to identify the characteristics of somebody that’s close to selling. Age can certainly be a factor there. It can also be the number of years in business or changes in the address. A lot of companies downsized and started working from home or remotely. You can see an expired accounting practice sales listing.  That’s usually a good characteristic of someone that was not successful. That’s how you’re going to start to find these opportunities.

While they may not have an official sales package on their firm, you can start to ask those questions and look at database reports. You can certainly sign a nondisclosure agreement so that they feel comfortable sharing that information with you. It’s about asking. It’s asking everyone, friends, family, and people you meet, doing a LinkedIn shirt search, and looking at your competitors or trade events.

Tax Practices: When you make it known to your community that you’re an investor in accounting practices, you become the go-to person. So when there is a panic or a crisis situation, you’re well positioned to come in and help.

These are all potential sources of that ideal acquisition for you. It’s about putting the word out that you are looking and you’re in the market. It’s about identifying those key players. That’s something that you guys could do. You could sit down, make a list of key players that you want to talk to, and start reaching out. It’s a great way to make contact and start that dialogue.

That’s all great next steps, but I’m curious to know what someone can expect at the end. What’s the best deal that you’ve seen someone personally who’s bought a tax practice for pennies on the dollars that became the deal detective that you’re describing?

The best deal that I’ve seen is someone who ended up getting it for zero. That’s a lot of being in the right place at the right time. You can start to build up that word that you are looking for. That could be as simple as letting people know that you’re looking to invest in a business. I recommend that being your introduction to people. It may be awkward if you’re cold-calling somebody. You are looking for a warm introduction. Do you know somebody who knows somebody so that they can introduce you?

Even introducing yourself as an investor, “I’m looking to invest in CPA firms or tax practices. I wanted to reach out and see if you know of anybody.” When you’re putting that word out, when something happens like a crisis, you become the go-to person. That’s how a colleague of mine picks up practices for nothing. A lot of times, what will happen is accountants die, unfortunately, without having enjoyed retirement. Their family is in a crisis mode or panic mode. What happens is the family shuts down the business. We know that there’s real value there.

When you make it known to your community that you’re an investor in accounting practices, you become that go-to person. When there is a panic or crisis situation, you’re well positioned to come in and help, especially when you pair that with having an ideal clientele that allows you to come in and offer a high-value service. That’s how you maximize the power of leverage, either not coming in with much cash at all, if any, or picking up these firms for next to nothing.

What deal structures have you seen that once you become the deal detective, you let people know you’re the go-to person when there’s a panic or crisis. You’re offered this business. What have you seen as the most successful deal structures that have closed for the buyer’s benefit?

I call these zero money out-of-pocket deals. What you want to do is analyze the balance sheet. If you can fund a deal from the company’s assets, you can come in with nothing down. You’re looking for things like accounts receivable, work in process, or the WIP account, and liabilities that the person might be looking to get out from under. All of those as part of deal points, and acquiring that business can allow you to come in and pick it up for nothing down.

Let’s say, for example, you’re looking at the balance sheet of tax practice. They’ve got $50,000 in accounts receivable. They’ve got about $19,000 in work in process. They have one credit card that is owed $7,000. Let’s talk about what that means. What happens when you assume an accounts receivable? That means you’re waiting for that person to pay you. Instead of the seller collecting on that, you would step into their shoes and collect. You’re waiting to collect on that, but you’re using that money to fund that deal.

If you say, “I’m going to let you keep possession of these accounts receivable. If you’ve got $50,000 or $100,000 sitting in accounts receivable, that becomes part of how you finance that deal. Work in process, for a buyer, that’s a liability. The company may have collected retainers or deposits on that, but you still have to fulfill the work that they’re engaged for.

For example, you’ve got $19,000 in work in process, and you’ve offered $100,000 for the firm. Instead of having to come up with $100,000 in money, you’re only having to come up with $81,000 in money because you subtract out any liabilities that are there. You do the same thing with a credit card. You’re going to subtract out and say, “I’m going to take that over. I’m going to assume that liability.” It’s a way to get that cash out-of-pocket number down. You don’t have to cough up a lot of cash to fund that deal. If you simply add accounts receivable, your work in process, and liabilities, that adds to what you’re going to have to come up with.

Tax Practices: The best deals are going to be found outside of a broker. If you’re willing to put in the effort to build those relationships, you will have something materialize from that.

You may not be able to come up with the entire purchase price that way. What you’re looking for is what we call a seller carry. You’re going to make payments to that seller over a certain period of time and interest rate. Let’s admit. Interest rates are on sale. It’s possible to have a note that’s carried by the seller for as little as 3%. You will be making payments over time, but think about that. You’re funding those payments with the revenue from the business.

If you increase your revenue by 300%, it’s a great deal.

That’s where this idea of earnouts comes in. You want to be careful with this. Don’t pay the seller for your leverage. When we talk about a seller carry, those are a set amount of payments. It totals a set amount. Oftentimes, what will happen is the buyer will come in and say, “I’ll pay you an earnout, and that’s how I’ll pay you what I owe you for the business.” If your goal is to come in and triple the revenues, be careful because you don’t want to start paying the seller more for your efforts.

Are there any other things that you can think of for those who are interested in gung-ho becoming a deal detective, learning, figuring out, and becoming the go-to person if there’s death? 70% of firm owners are above the age of 50. There are a lot of opportunities out there, but for someone who’s trying to buy a tax practice or an accounting firm for pennies on the dollar or free.

The unfortunate part of this is that it’s a lot of knocking and talking. It’s relationship-based. The best deals are going to be found outside of a broker. If you’re willing to put in the effort to build those relationships, you will have something materialized from that. An action step you might consider is to build your list of specific target candidates. You start doing some research and outreach to your network to say, “I’m an investor. I’m looking to invest in tax practice in the next year. Do you know of anybody?” Get talking about it. When you approach that person, you don’t have to be bold as to say, “I want to buy your firm.”

You build a relationship. You start to get to talking, “Hasn’t these last several years been hard? How much longer are you planning to learn all these new rules?” Even with an indirect approach and saying the same line, “I’m looking to invest in tax practice. Do you know of anybody that might be interested in selling in the next few years?” You can get some practice and do some research by searching accounting practice sale websites. You’re probably not going to find a fantastic deal by going through a broker because the broker wants to maximize the sales price. That’s their goal.

They get a commission. There will be a high dollar price point because they’re not going to work complimentary. They’re going to do all your deal paperwork. They won’t think of the WIP account, the balance sheet, the liabilities, and the AR account. Those are all great ways to have that and be part of the subtraction from the purchase price.

You’re mitigating that cash out of pocket.

Keep it as low as possible.

These brokerage sites can be a good way to get some practice. Go in and look at the listings. Analyze each one for what’s good and what’s bad. Get familiar with the terms and what to look for. When you do find somebody, you know exactly what you want to look for in their financial records and database reports to get a feel for what you’re buying.

Tax Practices: The key is to not buy something that’s going to saddle you with additional work you’re not looking for. Find the right mix of clients and then be okay that you won’t retain all of them.

From that, you can make a list of lead generators in terms of people that are connected or that may know somebody looking to get out in the near future. We’ve got lots of members in our community here at Certified Tax Planners. This is their growth strategy. They are regularly and routinely networking with practitioners. You can purchase a P10 list and contact tax preparers. You focus on the EAs and the CPAs in your area. You tell them that you’re an investor. You’re looking to invest in tax businesses and it starts the conversation.

It can be a fast and effective way to grow your tax planning business. The second key there is that you communicate about what you’re doing for someone in an effective way. If you’ve changed hands in terms of taking over a business, the last thing the customer wants to see is a change. They want to know that things are going to operate the same as usual unless you offer something better.

If you find those clients that are ideal for tax planning, you can say, “I would like to invite you to come in, sit down, and talk about your account.” There are some moves we can make that are going to save you $40,000 a year in taxes. You can take that person from maybe a $700 tax return to a $7,000 tax planning fee. That’s how you multiply the effectiveness of your purchase.

Dominique, thank you so much for sharing all of these amazing strategies and being the deal detective and the finder, mitigating how much cash you have to put down on any acquisition, and thinking about this as a way to grow your firm or revenue. These are leads you’re purchasing. No matter what, you have to pay for marketing, or you can pay for your leads this way.

It can be an effective way. The key is to not buy something that’s going to saddle you with additional work that you’re not looking for. Finding the right mix of clients and being okay that you won’t retain all of them is the abundance mindset.

You have to be okay with them leaving like Susie was finally okay with having a 30% to 50% leap, but she made drastic changes, and her revenue’s still up with way fewer volumes. That’s what this is about. Thank you again for being here with us on the show. It’s always an honor to have you. I hope to have you on a future episode.

You got it.

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Thank you all so much for joining Dominique and me here on the show. I love anytime we talk about ways and all her tips and tricks for growing your revenue. Buying firms is a great way because no matter what, you’re going to pay for your leads. You’re going to pay a marketing company to help you get leads. You’re going to get good at referrals and paying people that refer you to people. No matter what, you’re coming out of pocket.

I loved how she said, “You’re knocking.” You’re being about knocking and talking. If knocking and talking is your forte, you love talking to people, and you’re not one of the more introverted tax and accounting pros that I’ve worked with, this might be a great way for you to be that go-to person if something tragic happens and someone might be selling, or there is death.

This is your opportunity to leverage your knocking and talking, becoming a great deal detective, and sharing with people that you’re open to buying tax practices and changing them to have them benefit your company and your ideal type of client. Not buying it for the sheer volume, but knowing that you’re going to shed that volume. If knocking and talking is your thing, this is for sure the way to go.

Before you leave, remember, if you are a tax or accounting professional, are sick of grinding fourteen hours a day than having a horrible tax season, sacrificing your time with family and friends, and are completely exhausted from the daily financial rollercoaster, here’s what I have for you. My team and I have set aside time to speak to you personally about how you can apply new ideas to your firm, how to start charging premium fees, how to have clients appreciate you for the value you provide, knowing your worth, and start to fire clients who don’t value you and suck away your time and energy from you.

We can discuss that if you book a call at TheAbundantCall.com. We’re going to cover whatever your biggest challenges are because we’ve seen them all, and we know how to overcome them. On the call, we will get crystal clear on where you’re at, where you want to go with your firm and the things that are keeping you stuck. We’ll identify where you also want to be in your firm to ensure you never give a discount, you’re paid premiums, and you’re paid upfront all the time. You can avoid any pitfalls along the way. My team and I are looking forward to talking to you. Have a beautiful day.

Important Links

• American Institute of Certified Tax Planners
• Surgent CPE
• AICPA Women’s Leadership Summit
• TheAbundantCall.com
• The State of the Accounting Firms Succession

About Dominique Molina

Dominique successfully managed her own practice, a San Diego-based, full-service tax, accounting, and business consulting firm, serving hundreds of business owners and investors across the country for seven years. She has a bachelor’s degree in Accounting from San Diego State University, is a licensed CPA, has a Masters of Law – LLM, Tax Law, from Thomas Jefferson School of Law, and is a Certified Tax Strategist.