How Much Do Accounting Practices Sell For?

One of the key components of a CPA succession plan is the sale or transfer of the retiring CPA’s ownership interest. But how is the value of that interest determined? In this article, we will explore the factors that influence the value of an accounting practice and provide insights into the valuation process.

Valuation Multiples for an Accounting Firm

When valuing an accounting firm, there are several valuation multiples that can be used. These multiples provide a benchmark for determining the value of the firm based on its financial performance. The most common multiples used in the accounting industry include:

• Revenue Multiples: This multiple is calculated by dividing the firm's annual revenue by a predetermined factor. It provides an estimate of the firm's value based on its revenue.
• EBITDA Multiples: EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This multiple is calculated by dividing the firm's EBITDA by a predetermined factor. It provides an estimate of the firm's value based on its earnings.
• SDE Multiples: SDE stands for seller's discretionary earnings. This multiple is calculated by dividing the firm's SDE by a predetermined factor. It provides an estimate of the firm's value based on its cash flow.

Factors Influencing the Value of an Accounting Firm

While valuation multiples provide a starting point for determining the value of an accounting practice, there are several other factors that can influence the final sale price. These factors include:

• Marketing Strategy: A well-developed marketing strategy can increase the visibility and reputation of an accounting firm, which can positively impact its value.
• Growth Rate: Accounting firms that demonstrate consistent growth are often valued higher than firms with stagnant or declining revenue.
• Size of the Firm: Larger firms with a larger client base and more resources tend to have higher valuations.
• Location: The location of an accounting firm can also impact its value. Firms located in high-demand areas or in areas with a strong economy are often valued higher.
• Composition of Client Base: The composition of an accounting firm's client base can also influence its value. Firms with a diverse client base and long-term client relationships are often valued higher.
• The Quality of Your Team: The expertise and experience of the firm's employees can have a significant impact on its value. Firms with a highly skilled and experienced team are often valued higher.
• Recurring Revenue Model: Accounting firms that have a recurring revenue model, such as monthly retainer fees or subscription-based services, are often valued higher.
• Use of Modern Technology: Firms that leverage modern technology to improve efficiency and client service are often valued higher.
• How You Structure Your Deal: The structure of the sale or transfer can also impact the value of an accounting firm. For example, a firm that offers favorable terms or financing options may have a higher value.
• The Synergies Between Buyer & Seller: If the buyer and seller have complementary strengths or can create synergies by combining their operations, it can increase the value of the firm.
• Buyer Firms' Service: The reputation and track record of the buyer firms can also impact the value of an accounting practice.
• Level of Buyer's Profitability: The profitability of the buyer can influence the value of the firm. Buyers who can demonstrate a strong track record of profitability are often willing to pay a higher price.

Conclusion

The value of an accounting practice is determined by a combination of financial metrics, industry trends, and other factors that impact the firm's performance. By understanding the valuation multiples and factors that influence the value of an accounting firm, CPAs can make informed decisions when it comes to selling or transferring their ownership interest.