Getting the Most for Your Accounting Practice
Accounting Practice and CPA Valuation vs Fair Market Value
Every CPA and accounting practice for sale is different. In addition, each potential buyer of accounting practices enters the discussion with their own set of variables that hold importance in their business plan and to them personally. This is why the true definition of “Fair Market Value” is the value of a business based on what a knowledgeable, willing, and unpressured buyer would pay to a knowledgeable, willing, and unpressured seller in the market. So, is it possible that different buyers will determine the value to be more or less than 1 x book? Yes, if fact very likely that they will view your practice with different eyes than you do. Buyers have their own matrix of variables that they want to fit into their existing business plan and therefore the valuation consideration of all buyers will be different.
Take for example, a seasoned firm looking to grow, that primarily targets and solicits business entity relationships. When looking at a practice to buy that has a heavy concentration of unattached 1040 business, this company would likely not find tremendous value. On the other hand, a new CPA or accounting practice principal or one that deals more directly with 1040 might find an increased value to the same firm.
A second example is a buying firm that does not have capacity, but wants to grow significantly in the next 12 to 24 months. In addition to margin, location and other factors, the buying firm will place great value on the human capital inside the selling firm. In this case a selling firm with outstanding employees and perhaps key employees will bring tremendous value to the buying firm. They will look to purchase and hold on to these employees and will likely pay more to buy a practice with ample human capital. On the other hand, a buyer with plenty of lower cost employees that is trying to fill excess capacity will not find this human capital component valuable, in fact may actually reduce the price offered because they do not want the current and potentially highly paid employees.
Accounting practice and CPA principals sell their firm usually after a specialty broker has completed a robust valuation. Most of these valuations are based on a multiple of gross revenue with heavy consideration of cash flow margin, profitability location, size, mix, infrastructure and diversification. In general terms the higher the cash flow margin, the higher the multiple falls in the range of possible valuation multiples. The general range is .75 to 1.5 times gross recurring revenue, but deals can fall outside of this range. This however, does not mean that a buyer will buy your practice at this multiple.
A savvy specialty broker will be able to present many different kinds of buyers. This is one of the largest reasons you should consider talking to a specialty broker before making decisions to exit. Pulling multiple buyers into the buy/sell discussion changes the leverage of the selling firm and opens up your options considerably. Discussing your sale with just one potential buyer would almost guarantee that they will see the value of your firm differently than you. If this is the only one you are talking to, the buyer has all of the leverage. If a specialty broker does their job they will present multiple buyers and you should be able to pick from multiple offers. In addition, an accomplished specialty broker should be aware of the needs of each individual buyer in the buyer pool and be working to highlight those areas of your practice that will add value to them. One of these buyers will find similar valuation techniques as you and make offers accordingly.
Berkshire Business Sales and Acquisitions is a specialty accounting practice broker located in Arizona. We have nurtured an incredibly strong buyer pool in Arizona, throughout the United States, as well as outside of the United States. We source and solicit active buyers in private equity, strategic buyers, financial buyers and industry buyers. We consistently deliver a multitude of potential buyers for any principal wishing to sell their practice and strategically consider the needs of each buyer as we negotiate on your behalf. In addition, Berkshire uses a funnel like process to pull in the most possible buyers up front and funnels the best and most aggressive buyers to the fore front. This process is more fully explained in a video on our website landing page at www.berkshirebsa.com. If you are considering selling your accounting practice or CPA firm, consider starting with an experienced specialty broker to maximize the chances to find the right buyer with the best possible set of price and terms.