Four considerations when determining how much your accounting practice may be worth
This post provides an overview of the principles used to recommend asking prices for CPA / accounting practices. It delves into the analysis of key value drivers and offers a rough estimate of the value of your firm. It's crucial to note that there are market variations. Here are four important principles about valuing accounting practices:
Accounting practices are often said to be worth one times gross revenue: This belief is widespread in the accounting profession and is based on annual gross revenue. However, other small businesses are valued based on a multiple of net cash flow to owner. Service businesses typically sell for 1.5 to 2x cash flow to owner, while accounting practices are valued differently at 1x gross revenue. This can be advantageous if you maximize it.
20% of collections each year for five years: This is a common sale structure used by practice owners who sell on their own. It reflects the belief that the seller takes all the risk while the buyer takes no risk. At SK&S, we have seen this formula will net the seller significantly less in the long run— often up to 50% less. When representing the Seller, we prefer to sell practices for all cash or cash equivalent, reducing the seller's risk for client retention. Our goal is to shift as much risk as possible to the other side to ensure the best outcome for our clients.
Find as many potential buyers as possible: The value of a practice is directly tied to the number of buyers available. The more buyers you have, the more valuable the practice is.
Client hardiness: When we say "one times gross," we mean the present value of one times the gross amount that the seller is likely to actually receive the first few years. This relies upon a comprehensive approach to client retention and effective transitioning tactics that have worked for past clients. A sharp buyer is considering not just the ‘one-times gross’ number, but is also considering the likelihood of client retention. A practice with the same price that has clients who are already cloud-based will have a much higher likelihood of retention than a practice that still conducts all in person tax-preparation meetings.
At SK&S, we represent buyers or sellers contemplating an accounting practice transaction. If you contact us in the pre-LOI phase so we can offer you a free 30 minute consultation on your contemplated deal. We look forward to hearing from you! sharp@skandslegal.com
