6- crucial factors that impact the value of a CPA Practice
Valuation of a CPA practice is one of the most challenging aspects of a sale. Because of the complexities in evaluation, most accountants end up asking for a flat multiple of 0.9 to 1 times the business’s worth. Such deals are highly subjective because accountants tend to overlook the terms of the sale.
So, what are the factors that accountants must consider while valuing their firms?
Well, there is no one right answer!
This blog discusses six significant factors that accountants must include in their valuations.
Factors that impact the value of a CPA Practice
Location
Location usually plays a vital role in deciding the final selling price of a business. For example, firms located in busy downtown areas sell faster and for better multiples than their rural counterparts. Because buyers presume that these firms are synonymous with high net worth clients and fancy numbers.
Revenues
From the recent trends in practice sales, it is evident that firms with monthly recurring revenues and firms with low annual revenues sell quick.
Because of their predictable annual revenues, high potentials for growth, and their ability to quickly earn profits, buyers prefer firms with monthly recurring revenues over traditional firms.
On the other hand, firms with low annual revenues also tend to sell faster, because:
Smaller firms are easy to acquire and operate
It is easier to arrange funds required for the sale
Businesses get experienced staff members for a lesser price when compared to direct hiring
Client Retention
Accountants often tend to ignore this deal-breaking factor, especially in earnout sales.
So, who should bear the risks of client retention? Buyers or sellers?
Usually, sellers end up with the responsibility of client retention because they failed to include retention strategies in the sale process.
After a sale, clients tend to leave a practice for several reasons such as increased prices, inadequate staffing, poor customer service, profitability, cumbersome business processes, and even differences in the business philosophies of the buyer and the seller.
Terms of Sale
Terms of a sale and the value of the deal are mutually inclusive. Accountants often compromise on the terms and conditions of sale to achieve a target price and tend to undermine the risks involved. For example, consider a deal with 20% payout for 5-years with the responsibility of client retention. Sellers ignore the time-value of money in such transactions and end up incurring huge losses both in terms of money and authority.
To evade losses in your sale transactions, it is always a good idea to involve brokers or intermediaries. With their expertise and knowledge, brokers can win profitable deals and negotiate better terms on your behalf.
Marketing
In this era of social media, building a buzz around your business is essential, and marketing helps you to do exactly that.
Firms marketed through experienced brokers or intermediaries fetch higher multiples and negotiate better terms. Marketers will showcase your firm to a larger and more diverse audience, increasing your chances of attracting more lucrative deals.
On the other hand, accountants who sell on their own have limited exposure to the market and end up compromising on the sale terms. Experienced brokers understand the nuances of your business and help in negotiating better sale propositions and transition plans on your behalf.
More strategies for improving the salability of your practice here.
Scalability
Scalable accounting firms are modern accounting firms that deploy efficient processes and accounting technology solutions to drive a culture of growth and for creating pleasant experiences both for their clients and employees.
Buyers prefer scalable accounting firms because of their:
Efficient and repeatable business models
Huge profit margins
Quick ROIs
Skilled employees
High net-worth clients
If you are a small business owner, this post has some interesting strategies to make your practice more lucrative for potential buyers.