Purchasing a CPA firm can be a profitable investment—but only if you understand the financial metrics that truly matter. Beyond top-line revenue, savvy buyers dig deeper into profitability, client loyalty, and operational stability to ensure they are making a smart acquisition. Whether you’re a first-time buyer or an experienced investor, here are the key financial metrics you should carefully evaluate before purchasing a CPA firm.
Seller’s Discretionary Earnings (SDE)
Seller’s Discretionary Earnings (SDE) is often the starting point for valuing smaller CPA firms. SDE measures the total financial benefit a full-time owner-operator receives from the business. It includes net income, the owner’s salary, personal expenses run through the business, and non-recurring or discretionary expenses.
Why SDE Matters:
- Gives a clearer picture of true cash flow available to a new owner.
- Helps compare opportunities across different businesses.
- Provides the basis for most small CPA firm valuations, usually expressed as a multiple of SDE.
What to Look For:
- Consistency in SDE over the past 3–5 years.
- Adjustments for one-time expenses or unusually high owner perks.
- Trends that show growing or stable SDE, rather than decline.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
For larger CPA firms, EBITDA becomes a more relevant valuation metric. EBITDA focuses on the operating profitability of the firm by stripping away non-operational costs. It’s especially useful when comparing CPA firms of different sizes or evaluating a firm with multiple partners.
Why EBITDA Matters:
- Highlights the firm’s true operating profit potential.
- Useful for buyers who won’t be directly managing day-to-day operations.
- Helps in structuring financing and understanding return on investment (ROI).
What to Look For:
- EBITDA margin (EBITDA as a percentage of revenue) to assess operational efficiency.
- Year-over-year changes to EBITDA and reasons behind those changes.
- Adjustments needed for discretionary or non-recurring expenses.
Recurring Revenue Percentage
In the accounting industry, recurring revenue is a gold mine. Services such as bookkeeping, payroll processing, monthly advisory retainers, and annual tax engagements create predictable, repeatable income.
Why Recurring Revenue Matters:
- Provides a stable, predictable cash flow for the new owner.
- Reduces reliance on selling new services every year.
- Increases firm value because buyers can bank on future earnings.
What to Look For:
- The percentage of total revenue that is truly recurring.
- Types of recurring services offered and how defensible they are.
- Length and renewal terms of client service agreements (if any exist).
Client Retention Rates
Clients are the lifeblood of any CPA firm, and high retention rates are a major indicator of business health. A firm that retains clients year after year reflects strong relationships, consistent service quality, and lower marketing and onboarding costs.
Why Client Retention Matters:
- Higher retention means less risk of revenue decline post-acquisition.
- Indicates client satisfaction and loyalty to the brand, not just the outgoing owner.
- Helps forecast future cash flow and plan growth strategies.
What to Look For:
- Historical client retention rates (ideally 85–90% or higher).
- Key reasons for client losses (e.g., business closures vs. dissatisfaction).
- Client engagement levels (e.g., annual tax only vs. year-round advisory services).
Revenue per Client
Another critical metric is revenue per client. High average revenue per client suggests that the firm has built deep, valuable relationships with its clients—often through bundling multiple services or focusing on more complex work.
Why Revenue per Client Matters:
- Higher value clients can mean stronger loyalty and more profitability.
- Indicates upselling ability and deeper client relationships.
- Reduces reliance on constantly acquiring new clients to maintain growth.
What to Look For:
- Distribution of clients by revenue contribution (watch out for over-reliance on a few large clients).
- Opportunities to cross-sell or upsell additional services to existing clients.
- Segmentation of clients by industry, size, or service needs.
Profit Margins
Profit margin is a simple but powerful indicator of a firm’s financial health. It tells you what percentage of the firm’s revenue remains after covering all operating expenses.
Why Profit Margins Matter:
- Higher margins reflect operational efficiency and pricing power.
- Margins signal how much flexibility exists to handle unexpected costs.
- Firms with strong margins are generally more resilient during economic downturns.
What to Look For:
- Net profit margin trends over time.
- Comparison to industry benchmarks.
- Impact of technology investments or staffing models on margins.
Accounts Receivable Turnover
Accounts receivable (AR) turnover measures how quickly a firm collects payments from clients. Slow AR turnover can strain cash flow and indicate potential client management issues.
Why AR Turnover Matters:
- Fast collections mean stronger cash flow and less financing risk.
- Indicates discipline in client billing and collections practices.
- Reduces working capital requirements for a new owner.
What to Look For:
- Days Sales Outstanding (DSO) trends.
- Aging of receivables (how much is 30, 60, or 90+ days past due).
- Payment policies and enforcement history.
Key Takeaways
Evaluating a CPA firm for purchase goes beyond simply reviewing revenue numbers. Buyers must dig into metrics like SDE, EBITDA, recurring revenue, client retention rates, and profit margins to gain a full picture of the firm’s health and future potential.
By focusing on these financial indicators—and working with a professional business broker to sell your CPA firm, like Berkshire BSA—you can make informed decisions, minimize risk, and position yourself for long-term success after the acquisition.
If you’re considering buying a CPA firm, understanding these metrics isn’t just smart—it’s essential.
