CPA practice Valuations can and do vary quite a bit. The industry standard rule of thumb is “1 times gross” which is a very long-standing belief held in the accounting profession. This is very different from capital intensive businesses where future cash flows to owner(s) is the main driver of value (often expressed as EBITDA.) As you can certainly imagine, not all practices sell for one times gross fees. Some do and some don’t. Ultimately it depends on what a buyer is willing to pay, how a buyer is willing to pay, and what a seller will accept. Therefore, the valuation of any given CPA firm is inherently subjective. Practically every prospective buyer will have a different opinion of value. For this reason, having multiple buyers is essential to realizing the full value of a practice.
From our experience, the lion’s share of practices sell in the range of .9 to 1.3 times gross fees. Bear in mind that most of our practices sell for fixed prices at closing. This is a crucial distinction because extended payment terms may make the price multiple seem more attractive, but there is a tremendous amount of “fine print” to consider when evaluating terms. Unfortunately for MANY deals with contingent terms, a lot of the practice value is lost due to poor transitions, and poor service after closing.
We have identified six key factors that impact CPA practice values:
1. Location– This will have a very big impact on the number of potential buyers for a practice. In general, there are more buyers in large metropolitan areas and fewer buyers in remote, rural areas. When you sell a CPA practice, you are also “selling” the location. Areas that are desirable (such as coastal areas) can also help to attract more buyers. This seems more than obvious, but the more buyers, the higher the price. (You’ll see this theme running throughout this article.) Quite simply, when a seller has multiple candidates interested in a practice, there is a greater likelihood of finding a purchaser who is a good fit, and is willing to pay market value. The number of potential buyers for a practice is ultimately what determines the market value. If you have zero buyers, then there is no value. If you have 100 buyers, then the value will be set by the buyer who values the practice the most.
2. Size– In general, there are more buyers for practices that can be purchased and operated by a single owner. Practices under $ 1,000,000 generally fit into this category. Compared to larger practices, these firms are easier to manage and it is easier for CPA’s to qualify for acquisition financing for these amounts. As a side note, buyers of practices where revenue is greater than $1,000,000 per year, are often very focused on acquiring talented staff as part of the deal.
3. Marketing-Professionally marketed firms tend to sell for higher multiples with cleaner terms. Owners who sell on their own not only limit their exposure to the full market, but they also end up limiting discussions with a few purchasers at a time. Having an experienced intermediary who can guide sellers on selecting which buyers to spend time with and facilitate discussions in an efficient manner helps sellers maximize their time with prospects…and engage more prospects. This maximizes the number of qualified prospects in the mix, as well as allows owners to maintain proper focus on the business while it is being marketed.
4. Profitability-The more profitable the practice, the higher the price. More buyers are certainly interested in highly profitable practices where average client fees are high. Higher fees equates to more money for less work. That being the case, profitability doesn’t have the impact that many would think. This is primarily because there are many capable, experienced buyers who are confident in their abilities to increase profitability once they take over. The profitability of a firm is usually quite malleable.
5. Terms-There is an old saying…”You name the price and I’ll name the terms.” CPA practices do sell for fixed prices. In fact, many of our CPA practices sell for 100% cash at closing. Many private transactions involve lengthy earn-out periods. We believe that sellers have a tendency to take too much risk; and this is most often reflected in the terms. Please read Accounting Practice Sales Price and Terms for a more in depth look at the relationship between price and terms.
6. Curb Appeal-Having an office in a desirable location, having organized systems, and a neat office all create an impression to prospective buyers. Click here for a few ideas on getting an accounting practice ready for a sale.
Obviously there can be situations where other factors can impact value. Employee competitive threats, partner non-compete issues, nonrecurring revenues, declining clients, large clients are some of the more common issues that we encounter.