It will be a busy year this year for Mergers and Acquisitions in the accounting practice and CPA firm space. The baby boomers are exiting at a record pace, private equity, aggregators, and wealth management buyers are dominating the buyer pool and 2024 is the year that the greatest number of boomers turn sixty-five.
While M&A activity is just really beginning for 2024, I wanted to update my constituents on what we are seeing in the Mainstreet space for firm valuation multiples this year. We also want to further differentiate Mainstreet from other sectors of the market to add additional clarity. Lastly, we will discuss ways that practitioners can maximize their valuation multiples.
Mainstreet vs. Middle Market
There are different definitions of Mainstreet sized firms, we define Mainstreet as up to five million dollars in gross revenue. Others define Mainstreet as less than two million dollars of EBITDA. While the definitions are all over the board the important idea to grasp here is that these terms just attempt to segregate the market by size.
Middle market and private equity buyers are looking for larger firms with higher cash flow, a more developed infrastructure, management team and tech-stack. Mainstreet firms are simply smaller, and less tech-sophisticated with the principal still directly involved with billing and client management.
Size and Level of Infrastructure Development Matters when Addressing Valuation Multiples
One of the reasons we need to define these terms is because they sell to different buyers, and for different valuation multiples. Middle market and private equity buyers need continuity in the firm with management, technology, and infrastructure. They define valuation multiples using EBITDA vs SDE or revenue typically used with Mainstreet sized firms. Middle market and private equity buyers are not geared up to replace the principal that is the face of the business but desirous of a full exit on their way to retirement.
Valuation Multiples for Mainstreet Accounting Practice Pricing
In 2023 we did see compression of multiples in selling Mainstreet sized firms in Arizona. On average the compression was nonexistent in high performing firms. There was compression in firms with lower cash flow margins, firms where the principal was not able to stay on with the new firm for transition or firms without an age diversified staff. Arizona is one of few states with critical metropolitan mass where external demand is a little higher from out of state buyers.
Arizona is experiencing significant growth with a large metropolitan area (a footprint most large companies want to have). These factors have allowed high performing firm valuation multiples to remain strong. It is difficult to define the compression because each buying and selling firm has a myriad of internal intricacies and the volume of firms, we sell would not create a statistically valid representation. We would estimate the compression to be around 10 to 20 basis points.
It is Not All About Price
If you have any experience in this field, you understand that there is so much more than price to a successful exit. The amount of cash you get at closing might very well be the most important factor in the negotiation process. Like it or not, all transitions are tough, and some do not go all that well. The amount you get at closing is really important. Achieving your personal exit goals is also important and the strength and experience level of the buyer along with a quality transition is of paramount importance.
What Can Be Done Now if Selling in the Next Few Years
There are still plenty of tactics to deploy to ensure that you have the best chance at receiving a premium price and good terms from an experienced and credentialed buyer. Considering the state of the market, your willingness to stay on to help with the transition and production, getting your prices and margins up, working to an age diversified staff and using technology to help capacity and efficiency are all areas that remain talking points in deals. We will spend more time in future blogs discussing these matters, but a proactive approach now can pay big dividends later.
If you would like information on valuation multiples, want to understand your firm’s value and get tactics to achieve the best set of price and terms for your situation or if you are looking to sell now, consider reaching out to Berkshire Business Sales & Acquisitions. We specialize in valuing, preparing, marketing, and selling accounting practice and CPA firms in Arizona. You can also call Ryan Gipple directly at 602-614-3583.
