Most CPA’s and Accountants have a general understanding that accounting practices are valued at one-times gross revenue. While the “average” selling price for a practice is near one-times gross revenue, this is only the average.
Accounting and CPA practices typically sell between .75 and 1.5 of gross revenue. In order to properly price an accounting practice, a number of other factors must be considered.
The largest of these requires a profitability measure to be applied to the business model, and EBITDA or modified cash flow is used to determine the profitability level of the practice.
Other significant factors include size, location, and the nature of the revenue streams, which we’ll dig into further.
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Consider The Size Of The Practice
The size of an accounting practice is one major factor in the determination of the revenue multiple. Firms that are less than $150,000 in total revenue usually price out at the low end of the range. Firms are worth less at this size for two reasons.
The first is that a significant amount of infrastructure must be maintained for any size practice. The cash flow that exists within firms of this size is moderate at best.
The second reason is that lower cash flow almost always means an owner-operator is completing the accounting work and taxes themselves with very little extra cash flow for staff.
Firms from $150k to $750k will sell for 1 – 1.25 times gross transferable revenue. Firms in excess of $750k in revenue can sell between 1.25 – 1.5 times gross transferable revenue.
Location Of The Practice
Location is an important characteristic of price as well. CPA practices in large metropolitan areas such as Phoenix sell at a higher multiple than those located in smaller communities or rural areas. Liquidity and demand are the primary culprits behind this situation.
Just like the stock market brings liquidity to stock and bond sales, large metro areas bring liquidity and an ample number of buyers to the exit process. This demand pushes prices higher in these areas.
Look At Profitability
The third major factor is profitability. A profitability measure is a must in the valuation of a firm as it relates to where the firm gets priced in the multiple ranges discussed above. The nature of the clientele, billing rates, staffing, and payroll, as well as the business model and lease expense, all come together to create an EBITDA number.
The financials are then recast to determine the cash flow of the business and the cash flow margin often referred to as Seller Discretionary Earnings (SDE).
Firms with very high cash flow margins will command the multiples and the highest prices. This profitability measurement only makes sense.
Wouldn’t you be willing to pay more for a firm that generates more profit?
While there are other factors that come into play, the variables discussed above are primary in the determination of accounting practice valuation.
If you would like more information or are looking to sell your CPA or accounting practice in Arizona, look no further than Berkshire Business Sales and Acquisitions.
