“What is the fair market value of my firm?” is the largest question we receive when contacted by accounting and tax practitioners considering a sale. Taking firms into the market over the last 15 years has given us an exceptional understanding of demand, supply, and the algorithm used to value and sell firms.
In this article, we will explain a straightforward formula that, if employed, will give you an approximate firm value. We will also explain why this is an approximate firm value and what other factors add to and subtract from this value when attempting to market a firm for sale.
The best way to look at firm value is to consider a spectrum of multiples that vary due to profitability and the size of the selling firm.
- Firms up to $1 million in revenue are valued using Seller Discretionary Earnings (SDE) and expressed as revenue multiples between .75 -1.6 times gross recurring revenue. These firms are generally too small to have a meaningful EBITDA. There are exceptions to this range with virtual firms that have very high SDE margins.
- Firms in the $1-6 million revenue range, who have a more meaningful EBITDA, sell in the 3-8x EBITDA range.
- Firms with adjusted EBITDA more than $4 million sell between 7-12x EBITDA.
When considering these ranges, there are two primary determining factors and many other factors that will give you an accurate look at your firm’s value. The two primary factors are supply/demand and profitability. The current market is so dynamic that these ranges can adjust rapidly so make sure to give us call if you would like to know where you fall.
Secondary factors consider staffing, offshoring, technology & virtual operations, types of revenue streams, growth, niche, and deal structure. For the purposes of this essential guide, we will only consider practices, completing accounting (including fractional CFO), tax & assurance work as their primary revenue streams. Alternative revenue streams such as wealth management, legal services and more, should be valued separately.
Supply & Demand
The fair-market-value of an accounting practice is the price at which it would change hands between a willing and informed buyer and seller in an arm’s length transaction. The term is used throughout the Internal Revenue Code and in bankruptcy laws, state laws, and regulatory agencies.
In other words, supply and demand are primary factors in determining value. To go to an extreme, firms do not sell if there is zero demand, and the ongoing enterprise’s fair-market-value is zero.
The merger and acquisition marketplace is constantly changing. In this case, the aging baby boomer demographic is reaching retirement age, and they want to retire. The sheer nature of the size of this demographic is affecting the supply and demand relationship (increasing supply) which will tend to soften multiples over time. However, Private Equity has jumped into the accounting practice industry, and this increasing demand has put substantial upward pressure on multiples.
Any factor that will decrease the supply or increase the demand will put upward pressure on multiples. Likewise, an increase in the supply or a reduction in the demand for practices will cause a general lowering of the multiple. Consider small practices that do not have virtual operations in rural America. If the population of the community is small and there are just one or two practitioners in town, demand is extremely low. The multiple ranges below .75-1 times gross revenue may be more appropriate for this supply/demand equation. Likewise, firms with 2-5M in EBITDA are in high demand from Private Equity and roll-up buyers and trade at very high EBITDA multiples.
Margin (Profitability)
Assuming a solid balance of supply and demand (metro areas), a firm’s profitability will be primary in assessing a firm’s value. By looking at the cash flow margin of the firm, the principal can determine where on the range of pricing multiples (discussed earlier) they fall.
We generally use SDE margin (seller discretionary earnings) as our cash flow metric for firms below $1M in revenue. We generally use EBITDA margin (Earnings Before Interest Taxes Depreciation & Amortization) in firms above $1M in EBITDA. The higher the margin the larger the multiple. Likewise, the higher the EBITDA, the larger the multiple. For firms that fall in between, we calculate both sets of multiples and discuss the variance with sellers before setting a price.
Do not make it more complicated than it is. If you understand these two items, you will be far ahead of most. While there are other factors that can increase or decrease the multiples used for accounting firm valuation, supply and demand and the cash flow margin of the firm (SDE or EBITDA) are the two primary metrics when setting a multiple.
Staffing
A full staffing complement with non-compete or non-solicit agreements within a firm can add to the multiple used to value firms in today’s marketplace. A staffing complement that is well trained, age-diversified, and credentialed most definitely will add to the demand for your firm and therefore put upward pressure on price. The demand for good quality, credentialed staff is at an all-time high within the accounting and tax industries and buyers will pay for it.
Technology
The use of modern technology and the degree that a firm is conducting its operations virtually, are also factors that buyers will pay for. Technology is used to make things more efficient and reduce the number of staff a firm needs to employ. The staff and the client base must be trained in the technology. If well trained, margins will improve over time, and buyers will pay for rising margins and the use of robust technology within a firm. Virtual operations increase demand as there are no physical local constraints.
Revenue Streams
The type of revenue stream coming into the firm can affect price primarily because it alters the supply and demand portion of the pricing equation. Firms that complete assurance work or attest work will have a smaller buyer pool, for example. Fewer firms are completing audits and reviewing financials in today’s economy. If fewer firms are doing this work, then there are fewer buyers of practices that conduct this work. Practices with certain niche industries can also receive higher demand and therefore higher multiples.
Deal Structure
Deals structured with little down payment will have an extensive buyer pool (increased demand) but at elevated levels of risk to the seller. We are not recommending this as the terms are critical in realizing the price set, but it is a real factor in setting the price. You are much more likely to get a high multiple and price for your firm with little or no down payment, but how much of this price will you realize?
There are other factors, like growth rate that can impact price, but most of these other factors work to either change the cash flow within the firm and the ultimate profitability or the demand and supply relationship (both of which are primary in setting a price target). It is good advice not to overthink all these existential factors when pricing your firm. Let an expert do it for you!
Berkshire Business Sales & Acquisitions is a specialist that values, packages, markets, and sells accounting and CPA firms. We have the tools, knowledge, and experience to address all these items to maximize your price and minimize risk.
Accounting Firm Valuation FAQs
Start with where your firm falls on the size spectrum. Practices up to $1 million in revenue are valued on Seller’s Discretionary Earnings and expressed as a revenue multiple of roughly .75 to 1.6 times gross recurring revenue. Firms between $1 million and $6 million with meaningful EBITDA generally sell at 3 to 8 times EBITDA, and firms with adjusted EBITDA above $4 million sell at 7 to 12 times. That gives you an approximate value, but supply, demand, and your profit margin move the final number.
It depends mostly on size and profitability. Smaller firms under $1 million in revenue trade at .75 to 1.6 times gross recurring revenue. Firms in the $1 million to $6 million range sell around 3 to 8 times EBITDA, and the largest, most profitable firms with adjusted EBITDA over $4 million can reach 7 to 12 times. These ranges shift with the market, so treat them as a starting point rather than a fixed rule.
We use SDE margin for firms below $1 million in revenue, since they are usually too small to produce a meaningful EBITDA. We use EBITDA for firms above $1 million in EBITDA. For firms that fall in between, we calculate both and walk through the variance with the seller before setting a price.
Two carry the most weight: supply and demand, and the firm’s profit margin. After those, staffing, technology, virtual operations, revenue mix, niche, growth, and deal structure can push the multiple up or down. Most of those secondary factors work by changing either the firm’s cash flow or its demand, which loops back to the two primary drivers.
Private equity has moved into the accounting space and pushed demand up, which puts upward pressure on multiples. That demand is strongest for firms with roughly $2 million to $5 million in EBITDA, where private equity and roll-up buyers compete hard. At the same time, the wave of retiring baby boomer owners is increasing the supply of firms for sale, which works the other direction. The two forces are pulling against each other right now.
Yes. A trained, credentialed, age-diversified staff under non-compete or non-solicit agreements raises demand, and buyers will pay for it. Modern technology and virtual operations add value too, because they improve margins over time and remove the limits of a single physical location. Rising margins and a wider buyer pool both push the price up.
Because price and terms are not the same thing. A deal with little or no money down often carries a higher headline multiple, since the low barrier draws more buyers, but it also shifts real risk onto you as the seller. The question that matters is not just what the price is, but how much of it you will actually collect.
One thing to keep in mind: these EBITDA ranges (3 to 8x, 7 to 12x) are this article’s numbers, and they still differ from the EBITDA vs SDE post and the new graphic, which use 4 to 10x+. That’s the cross-document alignment item still sitting with Ryan. I matched this page so the FAQs are internally consistent, but once you two settle on one framing, these may need a small update.