How is an Accounting Firm Valued?
Valuation of an accounting firm will focus on five major variables and 15 key contributors to those major variables. The five major variables focus on making your firm attractive with regard to the framework of the deal itself. No one will acquire your firm to lose money but that doesn't mean you should give it away either. The five major variables in determining the value of a practice are:
- The amount of the down payment, if any
- Length of the payout period
- Profitability of the deal for the successor firm
- Duration of the retention period relating to clients being transitioned and other adjustment periods
- Price/Revenue multiple
How these five variables interact is how you will ultimately determine the value.
Consider the following equation: the less money down, the longer the retention and payout periods, the more profitable the deal is for the buyer, the higher the multiple. Of course, the opposite is true as well!
The 15 key contributors to the five major variables help establish a potential value baseline and focus on the following:
- Percent of service mix (Service mix is the percent by allocation of the work you and/or your staff perform for your total client base.)
- Percent of business clients
- Percent of individual clients
- Client demographics
- Staff strengths/weaknesses
- Location of practice
- Cross-selling opportunities
- Time & Timing
- Average number of times a client is serviced per year
- Lease obligations
- Cash flow
- Billing rates
- Realization rates
- Size of practice (gross billings)
For a deeper dive on valuing an accounting firm:
- How to Value a CPA Firm for Sale by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2013
- Pricing Issues for Small Firm Sales by Joel Sinkin and Terrence Putney, Journal of Accountancy, c2014
- CPA Firm Mergers: Is it A Buyers' or a Sellers' Marketplace? by Joel Sinkin, AccountingToday.com, c2012
- The Great Mystery: How Do Billing Rates and Profitability Affect a Firm's Worth? by Joel Sinkin and Terrence Putney, The Practicing CPA/AICPA, c2011
- Succession Planning - Valuing Partner Equity in Larger Firms by Joel Sinkin and Terrence Putney, CPA Practice Management Forum, c2009
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