Build Value inside a CPA Practice before Selling

Most CPA’s have heard that valuation multiples for accounting practices and CPA practices are based on gross recurring revenue and range between 75% and 150% of gross revenue. Some understand that even though the multiple is based on gross revenue, the multiplier selected is based on the profit margin or cash flow margin. What many practitioners overlook is all of the soft value drivers that can solidify a sale. Below you will find six of the top value drivers that, when employed correctly, should grow revenue and maximize cash flow but will give the appearance of a superior infrastructure and business health.

1)     A Motivated and Stable Team – The management of your practice should have some longevity and should have built in motivators that will properly align the management of the practice along with the owner’s objectives. It is also important that the staff and management have signed confidentiality/non-solicit agreements several years before the sale.

2)     Operating Systems that improve the consistency and sustainability of the Cash Flows – Buyers want to see systems. As an example, many CPAs themselves may not have the ability to generate new sales. With strong defined marketing systems that bring in new clients however, the potential buyer will be drawn more to your practice and may even be willing to pay more to get these systems. The marketing system built into your organization is just one example.

3)     Diversified Client Base – While this is understood, we will say it anyway. A client base should mirror the community unless specific emphasis has been placed on a particular industry sector, economic class, or cultural class. Even so, diversified clients within that individual class will add value and stability to the business and its cash flows.

4)     Curb Appeal – We talk a lot about curb appeal and much of this can be done right before sale but an office that looks organized, clean, and has appropriate aesthetics for the clients being served is important to a buyer. Buyers that walk into an unorganized office can easily assume this must be an unorganized business. While that may not be the case, don’t take the chance. Spend an hour reviewing the aesthetics of the office and “staging” your office with the appropriate look.

5)     Financial Controls – How does your office handle AR and AP? How do they collect on invoices? What is the accounts receivable aging and how do these get collected. These are just a few of the common questions asked in a sale regarding financial controls. Shoring up these systems and documenting them for a new buyer can help the buyer feel more comfortable with the billing systems and collections.

6)     Critical Mass – Valuation multiple ranges also fall as revenue falls. Practices below $150,000 often do not have enough critical mass to give ample cash flow for a new owner to take a salary while paying the old principal to stay for retention sake and still repay the debt involved in with a purchase. Building your critical mass does several things for you. It will bring the valuation multiple up; it will make organic growth much easier through client referrals and will attract more buyers to the cash flow.

As always, contact a professional business intermediary who can assess your current business and provide valuable information to help you prepare your CPA practice for sale.

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