Important Considerations when Valuing a CPA Firm for Sale
Selling an accounting practice is a complex endeavor. The typical sales process will involve several steps over the course of multiple months before the transaction is completed. One of the most important factors in the success of a CPA practice sale is placing a proper value on the firm. If the price is too high, the practice could remain on the market for a very long time, causing potential buyers to question why it has not been purchased yet. On the other hand, a low price will likely attract a buyer and a quick sale, but you will not be receiving top dollar for what is likely your most valuable asset.
The value of a CPA firm depends heavily on whether or not it is an internal or external sale. If you are selling a firm to another partner or family member rather than an external party, the sale price is likely to be lower, because other partners who helped build the practice would not usually be expected to pay the same as a stranger coming in from the outside. In the case of family, there may also be estate tax considerations, and a conservative valuation may be called for in order to reduce the purchase price of the firm to minimize tax consequences.
For external CPA sales, there are several factors that must be considered, here are three of the most important:
Profitability: Particularly with accounting practices, the buyer will want to see orderly bookkeeping and experience a smooth and seamless due diligence process. And at the end of the day, a large part of the valuation of the firm will be profitability. Profit margins can sometimes be increased through one-time investments such as technology upgrades, more effective marketing methods, and other efficiencies. This is often one of the best ways to optimize the value of a CPA firm for sale.
Down Payment and Financing: A large number of potential buyers will want/need to finance the majority of their purchase. Since bank financing and other traditional methods are more difficult to obtain these days, they will often look to the seller as a potential financier. If the seller ends up financing a large part of the transaction, they are taking on additional risk, and this risk should be factored into the purchase price.
Client Retention: Many buyers will also want to base the purchase price (at least partially) on the percentage of clients the buyer retains and fees they are able to collect over a specified period of time. If fees go down during the retention period, the seller receives less money, and vice versa.
Placing the right value on your CPA firm is important, but equally important is maximizing your marketing exposure to draw from the largest pool of potential buyers. Because of confidentiality and other considerations, this is difficult to accomplish on your own. A business intermediary, particularly one that specializes in accounting practice sales, can work hand in hand with you to navigate the complexities of the sales process and help guide the sale of your practice to a successful completion.