How to Value an Accounting Practice: What Is Your Firm Worth?

If you’re thinking about selling your accounting practice, the first question you probably have in mind is “What is my firm worth?” There are several variables that go into calculating the price of an accounting or CPA firm.

How Do You Value an Accounting Practice?

When valuing an accounting or CPA practice, consider the following: sales and earnings; types of service offered; book of business; human capital; and location. We go into each of these in detail below.

Sales and Earnings

Accounting and tax practices are sold for their book of business and goodwill – so a multiple of sales is a prime indicator of value. You may have heard of the “1 times gross” principle: essentially, the average of your gross revenue over the last 2 years. Most often, this number falls in the 0.8x to 1.3x range depending on the business’s profit or cash flow margin. A lower margin firm of 30% will trade toward the bottom of this range, while a higher margin firm of 55% typically trades for more. But starting in 2022, private equity firms have entered the marketplace, buying up firms at an incredible pace. Their focus is on small business clients for monthly bookkeeping and tax, payroll business, and personal tax prep. Their presence in the market has driven multiples up for these firms from 3 to 5 times EBITDA, with many settling in around 4 times.

Types of Service Offered

Revenue diversification is an important factor for potential buyers of your CPA firm. Practices generating more revenue from monthly accounting or bookkeeping services are often more profitable than those that focus primarily on tax preparation. Most buyers prefer to see regular monthly income throughout the year.

Because of cash flow constraints, diversification is especially important for smaller firms.

Book of Business

When deciding how to value your accounting practice, the size of a practice’s book is also a key driver. Even if you don’t have a large number of clients, you are sure to win the favor of a buyer if you can demonstrate steady growth in clientele.

While client volume impacts gross revenue, the type of client (businesses versus individuals) affects profitability. A higher proportion of business customers provides opportunities for recurring revenue streams and more complex and/or profitable services (audit, tax planning, etc.).

Human Capital

Due to lower overhead costs, single owner-operators are typically more profitable than multiple accountant practices. However, the latter can reduce management risk (i.e., professional and personal goodwill) and therefore the likelihood of client attrition.

Because of the pandemic and recent labor shortages, it is also harder for businesses to find good internal staff. More than ever, buyers want employees to stay and continue working. This minimizes change and the need to hire new workers. Also the use of outsourcing is being applied to many firms to increase profits and deal with the labor shortage that hit the profession after Covid.

Location

Location is another important factor and has a great impact on the potential number of buyers — and consequently, on the price of an accounting firm. A practice located in a metropolitan area often sells for more than one in a smaller city. Furthermore, a business situated in a popular, growing area might receive 10-20% more than an identical practice in a more isolated region.

As you can see, there are many nuances and factors to consider when placing a value on your accounting or tax practice. Partnering with an experienced broker like NCI will save you from the cumbersome research and negotiations involved in selling your business. We will help you to formulate a sales plan and discover your competitive advantages. We’ll even work with you to market your practice and find the perfect buyer at the best price possible.

Contact us here or give us a call at 1-888-639-2543 to learn more.