A Guide to Maximize Your CPA Firm Sale

You worked hard to grow your accounting practice, and you are now ready to pass it on to a new owner. Did you know CPA firms had a "banner year" in 2022, according to The CPA Journal's analysis of the 2023 NYSSCPA-Rosenberg Survey ⁽¹⁾. The survey shows revenue of participating CPA firms was up 11.4%, and income per partner was up 11.8%. This uptick in growth draws buyers looking for lucrative investment opportunities in the industry. How can you get buyers interested in your CPA firm?
 
Selling your CPA firm demands the same dedication you spent building your practice. We help take the guesswork out of what you must do to get your firm noticed. Here are some helpful tips and if you are ready to explore this topic further, be sure to Download our free eBook today.
 

How Do You Sell a CPA Firm? Tips to Prepare

Whether you are approaching retirement age, want to spend more time with your family, or looking to start something new, selling your CPA firm requires proper preparation. Careful consideration of timing, when you will sell your practice and paying attention to details, can ensure a smooth process when you are ready to sell your CPA firm.
 

Timing Your Sale

Before you seek out potential buyers for your business, consider the timing of the sale ⁽²⁾ of your CPA practice. The ideal timing will take advantage of your business’s peak financial performance, optimal market conditions, and industry trends. The following are important timing considerations:
 

• Strong Bottom line. A reasonable time to sell your CPA practice is when your business is trending upward and you have a solid bottom line. You will draw the most interest when a potential firm owner can envision a healthy forecast.

 

• Market conditions. Are other small firms in your area on the market, or did they recently sell? Look at the amount of competition, demand, buyer activity, and the sale prices of comparable small businesses. If the market is stagnant, you may need to wait until there is an uptick or ensure your firm stands apart from the others.

 

• Time of year. Aside from market conditions, consider tax season and the ebbs and flows in the accounting profession’s calendar. During tax season, January through April, buyers may hesitate to interrupt the workflow and take on a heavy workload. However, the summer and fall are quieter, and new buyers may be anxious to close a deal and get started helping new clients plan for the next year.

 

• Transition period. How much time and support will you personally give the new practice owner? Orient the owner to your practice and introduce them to the remaining staff and clients, then give the new team space to build their own processes and client relationships. Allot extra time as a buffer for help as requested.

 

• Personal and professional plans. It is essential to meet your personal timetable. Whether you are moving on to another business or retiring, if you have a hard stop, build a sales calendar to ensure you meet your deadline.

 

Enhancing Firm's Attractiveness

Maximizing your sale price should be a goal regardless of your reason for selling. You worked hard to build your business, and the selling price should reflect its worth. Now is the time to showcase your strengths and increase your business’s appeal ⁽³⁾ to buyers.

 

• Conduct an audit. Conducting a financial audit can show transparency and identify issues and areas for improvement within your firm. Addressing the problems before the sale can build credibility and improve the attractiveness of your firm to buyers.

 

• Highlight your clients. Let your potential buyers know your clients rely on you and return year after year. Highlight your customer satisfaction and client retention rates from surveys, testimonials, and collections data. A loyal client base is key when assessing your practice's value.

 

• Update technology. Ensure your accounting software, CRM software, website, and internal products are up-to-date and properly licensed. CPA firms rely heavily on technology; tech-savvy buyers will find your firm more appealing if you utilize modern technology.

 

• Spring cleaning. Don’t neglect the physical appearance of your office space. Spend time cleaning up and decluttering. Create an inviting office space.

 

How to Value Your CPA Firm

Assessing your company’s financial health will give you an idea of your firm's worth. While the mathematical calculations to determine the final value rely heavily on your company’s financials, the non-financial factors, like location, client base, and service offerings, help provide a comprehensive picture of your firm's worth.
 

Below is a look at factors to consider in your CPA practice’s valuation ⁽⁴⁾. Keep in mind that firms sold through a buy-out or to an insider will probably not undergo the same rigorous valuation as a firm sold to an external buyer.

Financial Performance

Your potential buyers will determine your firm’s strengths, potential risks, and overall value during their due diligence. Provide them with a positive feeling about their return on investment with accurate, appropriate reports that clearly show your firm's stability and longevity.
 

• Ensure accurate and up-to-date financial statements.

• Show consistent revenue growth over the most current years.

• Emphasize efficient operations through effective cash flow management and the firm’s ability to meet short-term and long-term financial obligations.

• Highlight your diversified service offerings with competitive hourly rates and fees, and your ability to generate income across multiple revenue streams.

• Demonstrate your company’s growth potential with sales growth and client retention.

 

Client Base

A CPA firm is nothing without clients. Demonstrate your practice management skills with your deep, loyal client base. Update your CRM records and rank and categorize your clients according to demographic, longevity, number of services purchased, satisfaction, and potential business. Organizing your client base will give you the information you need to calculate your clients’ financial worth.
 

Staff & Operations

Your CPA practice’s size, staff expertise, and efficiency of operations are all indicators of the success of your business. Are your company operations streamlined? Are you positioned for growth? Do you have a stable and satisfied employee base? Do you have well-documented procedures and processes? While placing a monetary value on these items is challenging, each factor contributes to the overall assessment of your accounting firm’s worth.
 

Methodologies for Valuation

There are two popular methods to use for a CPA practice valuation, both with variations on the calculation. You may want to calculate the value using several options to find a range for the valuation before settling on a value you believe accurately reflects your firm's worth.

 

• Multiple of Gross Revenue. Also referred to as one-time gross revenue, the multiple of gross revenue calculation determines the value of a company as a multiple of its revenue for a set period. Some estimates use the latest financial year, whereas other calculations rely on an average of several years. This popular valuation method is favored by new firms with a thin profit margin. The buyer agrees to pay a multiple for every $1 gross revenue. Often, the multiple is one; however, the multiple can range from 0.5 to 1.5 times the revenue, depending on the market conditions and firm appeal. Using these multiples as an example, a firm generating $500,000 in annual revenue could sell for as low as $250,000 or as high as $750,000.

 

• Market Multiples. The valuation multiples apply a numerical factor to your firm’s financial metrics, such as cash flow, earnings, or revenue. Common multiples used in the sale of CPA firms include EBIDTA (Earnings Before Interest, Taxes, Depreciation, and Amortization), revenue, and SDE (seller’s discretionary earnings). The multiple of earnings valuation typically realizes a higher price than multiple of its annual gross revenues. See “Understanding Market Multiples” below for additional  information.

 

Average Timeframes for Selling a CPA Firm

How long does it take to sell a CPA firm? Various factors will affect the range of time for each phase and timeline of your sale based on your specific situation. Anticipate dedicating six months to a year to sell your firm.

Here is a general idea of the phases and their associated durations to better help you create a streamlined plan for the successful sale of your CPA firm.
 

Initial Preparation and Listing (1 – 3 months)

You and your co-owners are primarily in control of this phase. In the preparation phase, you enhance your firm's appeal to potential buyers, gather all the essential documentation, and reach out to brokers, if appropriate. The size of your business, your organizational level, and the condition of your records and office space are vital factors. Creating comprehensive documentation can expedite the due diligence phase.
 

Marketing to Potential Buyers (3 – 6 months)

The time it takes to attract interested buyers depends on the current market. During a good market, buyers may seek you out. A slow market, on the other hand, will require reaching out through multiple marketing channels and spending more time networking.
 

Due Diligence (2 – 4 months)

Interested buyers will take time to thoroughly examine your firm's financial records, ⁽⁵⁾ operations, client data, and other important aspects of the business. Multiple potential buyers will extend the timeline. Providing accurate, thorough information collected during preparation can shorten this phase.
 

Finalizing Sale (2 – 6 months)

Finalizing the sale involves negotiations, legal processes, securing financing, and transition planning. The size of your business and the number of interested buyers will affect the time it will take to close the sale.
 

Essential Documentation

Preparing for the sale of your CPA firm involves gathering and creating sufficient documents and information to present a clear picture of your business and to meet contractual and legal requirements. It also ensures transparency and assists your buyer conduct thorough due diligence.
 
Here is a checklist of some of the necessary documents:

Financial Statements and Tax Returns

1. Profit and loss statements (the last three to five years)
2. Balance sheets
3. Cash flow statements
4. Bank statements
5. Federal tax returns for the past three to five years

 

Client Lists and Service Agreements

1. Client lists and associated information
2. Engagement letters and contracts
3. Client accounting service agreements
4. Outstanding proposals
5. Client billing and collections data
6. Client testimonials, feedback, and satisfaction surveys

 

Operational Manuals and Employee Records

1. Employee agreements
2. Staff resumes, certifications, and qualifications
3. Organizational charts
4. Employee benefits and compensation details
5. Employee handbook or company operation manuals
6. Accounting manual
7. Any SOPs (standard operating procedures)

 

Legal and Compliance Documents

1. Partnership agreement (in the case of multiple owners) or Articles of Organization
2. Company bylaws (if appropriate)
3. Non-disclosure agreements (NDAs)
4. Non-compete agreements (NCAs)
5. Audit records ⁽⁶⁾
6. Property lease agreements

Your legal team needs to be consulted early and before you disclose any information to a potential buyer.

Understanding Market Multiples

Sellers favor the market multiples CPA firm valuation methodology because it typically yields a higher valuation than the gross revenue calculation. There is a lot of data used in the computation, and the valuation process can be complex. For an accurate valuation, contact a business appraiser. The market multiples relies on the following four variables ⁽⁷⁾:
 

• Upfront Cash Investment. The upfront cash investment is the amount the buyer is willing to pay as a down payment. When determining the amount of their down payment, buyers will consider how the time of year of the sale affects the company's cash flow and whether the seller will loan the accounts receivables to them. The down payment amount may result in an adjustment of the valuation multiples.

 

• Retention Period. Buyers estimate the duration the current clients will remain with the new firm owners, and they pay a percentage of the fees collected for a specified period after the deal closes. The retention period could vary from two years to five or more. The buyer pays the seller a percentage of monies collected from clients at the time of the sale, so if there is client attrition and a loss in fees collected, the payments to the seller will decrease. Conversely, higher client fees may result in higher payments.

 

• Duration of the Payout Period. How many years will the buyer take to pay for your accounting firm? Larger firms may extend to 10 years, whereas smaller firms may complete their payments under six years. An extended payout period can improve the buyers’ cash flow.

 

• Profitability. Profitability is not as straightforward as it sounds. In the case of multiples, profitability refers to the buyer’s expected profits, not the seller’s historical values. It is the perceived financial strength or expected return on investment.

 

Valuing Your CPA Firm Using Market Multiples

The multiple used in the calculations is a product of carefully analyzing all the variables and factors that can add to or subtract from the firm’s value. The multiples vary across industries ⁽⁸⁾ and within the financial sector, and they vary across the type of multiples calculation. The multiples listed below are average market multiples ⁽⁹⁾ for an accounting firm and are listed as a guideline only.

 

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Multiple

Calculate the EBITDA multiple value by multiplying the firm's EBITDA, representing its profitability, by the multiple. The EBITDA multiple helps calculate the return on investment the owner can make from the sale.

Average EBITDA Multiple Range: 2.99x – 4.45x
 

SDE (Seller’s Discretionary Earnings) Multiple

SDE represents your CPA practice's net income, plus other discretionary expenses, like the owner's salary, that are typically added back to more accurately reflect the value. Calculate the SDE multiple value by multiplying the firm's SDE by the multiple.

Average SDE Multiple Range: 1.81x – 3.25x
 

REV (Revenue) Multiple

Calculate the REV multiple value by multiplying the firm's revenue or sales by the valuation multiple. The REV multiple represents the total sales revenue generated by the accounting firm.

Average REV Multiple Range: 0.71x – 1.09x
 

Are you planning to sell your CPA firm?

Before you put your CPA practice on the market, make sure you understand the process and requirements. Download our free guide to help you better prepare. Find information on how you can help increase your business’s value, how long your sale may take, and more.

 
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Sources:

1. State of the Profession
2. How Do You Know When It’s The Right Time To Sell Your Company?
3. 5 ways small businesses can become more attractive to buyers
4. Practice Continuation Agreements: Placing a Value on Your Practice
5. Due Diligence in 10 Easy Steps
6. Retention of Records Relevant to Audits and Reviews
7. How to value a CPA firm for sale
8. Valuation Multiples by Industry
9. Valuation Multiples for an Accounting Firm