Measuring the Value of an Accounting Firm for Sale
With the Baby Boomers retiring, there are CPA practices for sale throughout the country. This is good news for aspiring accounting entrepreneurs that want to own their own firms, because it is generally less risky to buy into an established practice than to try to build one from scratch. Your chances of success are much greater if you have an existing clientele base from which to grow.
Although buying an accounting firm is generally a good business move, not all practices are created equal. Before moving forward, it is important to properly measure the value of the firm so you know you are not overpaying.
Here are some important factors to consider when looking into the purchase of a CPA practice:
Terms of the Sale: The terms and conditions of the purchase play an important role in the value. For example, if you are able to pay cash for the business, you will probably be able to negotiate a lower price. Most buyers, however, will need some type of financing to put together the deal.
If the seller is willing to finance part or all of the practice, this could be advantageous because you may be able to receive a lower interest rate than from traditional financing sources. Another related area to look at is upfront costs. For some transactions, the buyer must come up with 10% to 20% for a down payment. In other cases, they may be able to buy in without a down payment at all. The value of the CPA firm for sale should be adjusted accordingly based on these (and other) terms and conditions.
Profitability: The net profit the firm produces is always a major factor in its valuation. However, from the perspective of the buyer, you need to look at the profitability of the practice after the purchase is made. Fixed overhead costs, the cost of financing and the likelihood of high client retention must all be taken into account to give the buyer a better picture of what the profit margin will be.
Retention Period: Many deals include a retention period wherein the buyer pays a specified percentage of the revenue collected for a specified period. Retention periods are generally good for the buyer because they provide a financial incentive (for the seller) for the firm to maintain and/or increase revenue. This will often motivate the seller to stay on working as a consultant or working part-time to help ensure that the current clientele remains.
Location of the Firm: The location of the practice is important for future growth opportunities. For example, firms that are in major metropolitan areas generally have far greater growth potential than firms in smaller towns. In addition, the location within a metropolitan area (i.e. which side of town it’s on) can be just as important. Buyers should look for a practice that is in an area with a healthy number of businesses and a growing population.
There are several other intangibles that contribute to the value of an accounting firm. To ensure that you have all your bases covered, it is best to work with a business broker that has particular expertise in CPA practice sales. A business intermediary that specializes in this area will help you find the right fit for your circumstances so you can enter into the investment in the best possible position to succeed.