Key Factors in Valuing a CPA Firm

The value of CPA practices can vary greatly. As a seller, naturally you’d like to get the most you can for your firm and need an idea of what you should expect to be paid for it. If you are looking to buy a CPA practice then you need an idea of what you would be paying in the current market climate. While there is an industry standard for valuing a CPA firm, there are several other factors that contribute to the firm’s net worth.

CPA Practice Valuation Industry Standard

The industry standard rule of thumb is “1 times gross” which is a very long-standing belief held in the accounting profession. This multiple can be very misleading without considering payment terms. Terms are a crucial consideration 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.

From our experience, most practices sell in the range of .9 to 1.3 times gross fees. Keep in mind that most of our practices sell for fixed prices at closing. CPA practice valuations are very different from capital-intensive businesses where future cash flows to the owner(s) is the main driver of value (often expressed as EBITDA). While the industry standard is “1 times gross fees”, not all practices sell for that amount. . Ultimately, it depends on what a buyer is willing to pay, how a buyer is willing to pay, and what a seller will accept.

The valuation of any given CPA firm is inherently subjective. Practically every prospective buyer will have a different opinion of value. Having multiple buyers is essential to realizing the full value of a practice.

6 KEY FACTORS THAT IMPACT CPA PRACTICE VALUATION:

1. Accounting Firm’s Location An accounting firm’s location 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. When you have multiple buyers competing to purchase your practice, you can get a higher price.. 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 of CPA Practice In general, there are more buyers for practices that can be purchased and operated by a single owner. Practices under $ 1,500,000 generally fit into this category. Compared to larger practices, these firms are easier to manage and it is easier for CPAs to qualify for acquisition financing for these amounts. Buyers of practices where revenue is greater than $1,500,000 per year are often very focused on acquiring talented staff as part of the deal

3. Professional Marketing for CPA Sellers 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 efficiently helps sellers maximize their time with prospects…and engage with 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. Potential Practice 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 equate 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. CPA Firm Purchase 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 percent cash at closing. Many private transactions involve lengthy earn-out periods. We believe that sellers tend 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. Firm’s Office Curb Appeal

Having an office in a desirable community, efficient easy to use systems, and a clean organized office all create an impression on prospective buyers. Discover a few ideas on getting an accounting practice ready for a sale.

There can always be situations where other factors will impact value. Employee competitive threats, partner non-compete issues, non recurring revenues, declining clients and large clients are some of the more common issues that Poe Group has  encountered.

For a more detailed analysis of the value of your practice, please contact team of experienced CPA intermediaries today.