Valuing a CPA Firm: A Step-by-Step Guide

Valuing a CPA firm requires a thorough and systematic approach. This guide will walk you through the key steps to determine the value of a CPA firm.

The first step is to identify the firm's assets, including its tangible assets such as office equipment and intangible assets like its client list. These assets can significantly impact the firm's value.

Consider the firm's revenue streams, including audit, tax, and consulting services, as well as its client base and retention rates. A firm with a strong and loyal client base is likely to be more valuable than one with a less stable client base.

A CPA firm's value is also influenced by its location, with firms in high-demand areas like major cities commanding higher prices.

The market has set the value for smaller accounting practices with revenue below $1.2 - $1.5 million, with a simple dollar-for-dollar calculation where the business's annual revenue is generally its value.

A business valuation can help determine a fair purchase price for buying an accounting firm or a fair listing price for selling one.

For smaller practices, the value might be arrived at through an averaging process if annual revenues have varied dramatically over the last few years.

Business appraisers use various methods to determine the value of an accounting firm, often using the market approach with valuation multiples.

Below $1.2 million in revenue, the price calculation is a multiple of EBITDA, or net profit after tax, for larger accounting practices with revenue above $1.2 - $1.5 million.

There are over 37,400 accounting businesses in Australia, according to IBIS World, with the majority being small to medium enterprises (SMEs).

The multiple is a key concept in valuing a CPA firm. It's essentially a ratio that compares two factors, such as revenue or earnings to value. According to Peak Business Valuation, a multiple of gross revenue for the trailing 12 months is the most widely used valuation methodology in the profession.

Typically, one times revenue is the predominant multiple, but it's possible to see higher or lower than this depending on the factors that will be discussed below. The result of this calculation gives an estimate of the company's worth.

The average EBITDA multiple range for accounting firms is 2.99x – 4.45x, and this multiple is often used to calculate the return on investment (ROI) that the owner expects to make from the accounting firm. A high SDE multiple is also attractive to buyers, as it indicates a well-managed accounting practice.

A multiple of gross revenue is often used as a simple and quick way to compare the financial performance of different companies. This method focuses on the net cash flow, which is the amount of cash a firm has after all other expenses have been incurred.

For smaller practices with revenue below $1.2 - $1.5 million, the market has set the value, and it's a simple dollar-for-dollar calculation – the business's annual revenue is generally its value. This is because the buyer would be very interested in what caused those revenue fluctuations.

In general, the multiple used to value an accounting practice depends on the firm's revenue level, with smaller firms trading at $1.10 to $1.20 times revenue. However, if there are factors leading to a higher demand, such as great talent or a unique mix of clients, valuations might change.

The size of a CPA firm is a crucial factor in determining its value, as it impacts the number of potential buyers. A smaller firm may generate more interest and attract more potential buyers, resulting in a better price.

A large and stable client base is also a key factor in increasing a CPA firm's value. Companies with a large and stable customer base, especially those offering specialized services, are usually valued highly due to their stable revenue and potential for further development.

A CPA firm's growth rate is another important factor in determining its value. Firms with high growth rates, such as 30% per year, are more likely to have a higher valuation compared to stagnant firms with little growth, as investors and buyers seek firms with high growth potential.

The Quality of Your Team is a Crucial Factor in Valuation.

A firm with highly qualified individuals on the team who can deal with clients themselves will fetch a higher valuation than those with more junior-level team members.

Buyers will evaluate the strength of your team when purchasing a firm.

These highly qualified team members bring a level of expertise and stability to the firm that is attractive to potential buyers.

A high growth rate can significantly impact the value of a CPA firm. Firms growing at a faster rate, such as 30% per annum, will have a higher valuation compared to those with lower growth rates.

Fast growth is a sign of a well-managed business that's expanding to meet market needs. Customers and investors are attracted to firms that show greater increases in size, as this indicates future growth and market dominance.

A CPA firm with a high growth rate of 30% per year is more likely to have a higher valuation than a stagnant firm with little growth. This is because investors and buyers tend to look for firms with high growth potential, as they believe these firms will generate higher returns on their investments in the future.

High growth rates signal a firm's capacity to acquire additional clients and generate higher revenues, making the firm a better investment prospect than slow or declining firms.

Urban areas often have a larger and more diverse client base, as well as a larger pool of potential employees, making them more attractive to potential buyers.

A rural location can be less expensive to operate, which is a significant advantage for a CPA firm.

CPA firms in rural areas often have a more loyal client base, which can also increase their value and marketability.

However, this loyal client base may not be enough to compensate for the limited growth opportunities in a rural area.

A loyal client base can be a valuable asset for a CPA firm, regardless of its location.

The cost approach is a method used to value a firm by estimating the cost of replacing its assets. This includes both physical assets like computers and office furniture, as well as non-physical assets like client lists.

Replacing all a firm's assets can cost as much as $400,000, as seen in one example. However, if these assets have depreciated by $100,000, the value of the firm would be $300,000.

The cost approach provides a consistent and objective valuation, but it may not reflect the firm's business operations or future benefits, especially for firms with significant intangible assets.

The market has set the value for smaller accounting practices with revenue below $1.2 to $1.5 million, where a simple dollar-for-dollar calculation is often used.

This calculation is based on the business's annual revenue, which is generally its value, or at least the starting point.

For example, if a practice's revenue was $650,000 in the last financial year, its market value likely starts at $650,000.

However, there are exceptions to the rule, such as dramatic revenue fluctuations over the years, which may require an averaging process.

A transaction advisor can help simplify the process by finding a good match with interested buyers and ensuring a fair price.

The price calculation for larger practices with revenue above $1.2 to $1.5 million moves to a multiple of EBITDA, or net profit after tax.

Arriving at Value is a crucial step in the valuation process. It's a simple yet effective way to determine a company's worth. The market has set the value for smaller practices with revenue below $1.2-$1.5 million, with a dollar-for-dollar calculation being the norm. This means that a practice's annual revenue is generally its value, or at least the starting point for valuation.

A practice's revenue is a key factor in determining its value. If a practice's revenue was $650,000 in the last financial year, its market value likely starts at $650,000. If its revenue was $400,000, that is probably what it is worth at a minimum. However, there are exceptions to the rule, such as dramatic revenue fluctuations over the years.

The value of a practice can change if there are factors leading to a higher demand. This might include great talent, a geographical area of interest, or an attractive or unique mix of clients or an industry niche. If annual revenues have varied dramatically over the last few years, the value might instead be arrived at through an averaging process.

In some cases, the value of a practice is determined by a multiple of EBITDA, or net profit after tax. This is typically the case for practices with revenue above $1.2 million to $1.5 million. The multiple used can vary depending on the practice's reputation, clients, and opportunities for development.

A simple and quick way to estimate a company's worth is by using a multiple of gross revenue. Typically, one times revenue is the predominant multiple, but it can be higher or lower depending on various factors. This calculation gives an estimate of the company's worth and is often used as a way to compare the financial performance of different companies.

The value of a company can also be influenced by its revenue model. A recurring revenue model, where clients are charged on a fixed monthly basis, can ensure predictable revenues and a higher valuation. This is because recurring revenue is less risky for the buyer and can lead to a more stable financial future for the company.

A dollar-for-dollar calculation may not be applicable to all practices, especially those with variable revenue or those that are not in a high-demand geographical area. In such cases, an averaging process or a multiple of EBITDA may be used to determine the practice's value.

The payout period duration is a critical aspect of the valuation process. It's the time frame over which the buyer pays the seller.

For small firms, the payout period usually spans four to six years, with five years being the most common. This allows the buyer to manage cash flow more effectively.

A longer payout period often justifies a higher valuation because it gives the buyer more time to generate cash flow. In contrast, shorter payout periods may necessitate a lower valuation due to increased financial pressure on the buyer.

The length of the payout period can affect the overall value significantly. A payout period as long as five to seven years is common for small firms.

Larger firms tend to have longer payment terms, which have a higher valuation. This is because buyers evaluate the profitability of a purchase based on the cash flow generated.

Business appraisers use various methods to determine the value of an accounting firm, often using the market approach. This method uses valuation multiples, which can help determine a fair purchase price for buying an accounting firm.

If you're buying an accounting firm, a business valuation can help you negotiate a fair price. A business appraiser may discuss effective negotiation strategies with you.

Some businesses mainly serve consumers and small business owners, while others serve medium-to-large-sized businesses. If your CPA practice is similar to the clients that your buyers offer, your valuation will be higher.

Here are some services offered by buyer firms:

The market has set the value for smaller practices with revenue below about $1.2 - $1.5 million, where the business's annual revenue is generally its value, or at least the starting point.

When you're thinking about who might buy your CPA practice, it's essential to consider their services. Some buyer firms offer a range of services to their clients, including bookkeeping, tax and accounting services, auditing, and other services like payroll and human resource management.

These services can vary depending on the size of the businesses they serve. Some buyer firms cater to consumers and small business owners, while others serve medium-to-large-sized businesses.

If your CPA practice is similar to the clients that buyer firms serve, your valuation will be higher. This is because a buyer firm will likely see value in acquiring a practice with a similar client base.

Here are some services that buyer firms may offer:

The level of a buyer's profitability is a key factor in determining the value of an accounting practice.

Buyers want a profitable company, and profitability increases valuation.

If your margins are low, focus on boosting margins before selling your firm.

A dollar-for-dollar calculation is often used for smaller practices with revenue below $1.2 - $1.5 million, where the business's annual revenue is generally its value.

However, if annual revenues have varied dramatically over the last few years, the value might instead be arrived at through an averaging process.

A higher demand can also lead to higher valuations, such as when a firm comes with great talent or is in a geographical area of interest.

But if your company is more profitable and has a higher margin percentage, it will fetch a higher valuation.