Since each CPA practice is unique, it’s crucial to take the time to correctly value a CPA practice. All too often, a CPA devotes decades of work to his or her company, then offers the practice for sale for much less than it’s worth. Since the accounting practice is probably their largest asset, retiring CPAs can impact their financial future if they leave money on the table when selling a CPA practice.
Here are a few points to ponder when determining the valuation of a CPA practice:
SDE vs. Revenue Multiples
Never sell a CPA practice for 100% of billings without speaking with an expert first. Many industries base the market value of businesses on multiples of earnings before interest, taxes, depreciation and amortization (EBITDA). Another way is to look at Seller’s Discretionary Earnings (SDE), defined as EBITDA plus owner’s compensation and benefits and other discretionary expenses or “add-backs.”
Assuming other variables are equal, buyers prefer firms with high SDE over low SDE. Two single-owner firms in the same city might both have $500,000 in annual collected billings. One is managed well, producing an annual cash-basis SDE to the owner of $250,000, while the other is poorly managed and only produces $50,000 SDE. Which practice would you prefer to buy?
An extremely well managed accounting practice for sale with a high SDE should be valued at more than 100 percent of its annual billings. There is very high demand from buyers for such profitable businesses. Accounting Broker Acquisition Group has sold many accounting practices for 150% or more of annual billings, and even as high as 200% for extremely profitable and desirable firms. CPA practice owners with high SDE should consider using SDE as the primary valuation methodology to achieve the highest possible asking price.
Raising your SDE
But what about CPA practice owners with low SDE? If possible, raise your SDE before you start the process of selling your CPA practice. We have talked to owners with low SDE accounting firms for sale and advised them to raise fees, cut costs, enhance the bottom line and call us in a few years. After taking our advice and implementing changes to improve profitability, within a few years we were able to sell their CPA practices for more than they ever thought possible, with high levels of cash at closing.
Under an earn-out deal structure, the buyer pays a generally small down payment and the remainder is paid on a contingency basis, based on collections from existing clients, over a set period of time. Sellers beware: you bear most of the risk under this structure.
Here’s how it works. The buyer takes over the business, and then pays the seller a certain percentage of fees collected over a negotiated payout period, usually three to 10 years. If the buyer does well, so does the seller. If not…you see the problem.
This structure gives the buyer an incentive not to perform. When the going gets tough, the buyer will not work nearly as hard as if he paid the seller most or all of the purchase price in cash at closing.
A couple of scenarios happen all too often with an earn-out deal. The buyer has some misfortune that interferes with business – illness, or the loss of a key employee. The buyer does not pick up the slack and clients are lost. Or the buyer might be a cherry-picker, keeping favored clients and not answering the phone for others. In both these scenarios, the seller experiences a thinner wallet and consternation over disappointing once-loyal clients.
Not all buyers subscribe to the earn-out mentality. A seller should avoid an earn-out deal by making his or her firm available to many qualified buyers and receiving multiple offers for the practice. The best way to do this is by taking advantage of Accounting Broker’s proprietary database of buyers . . . the most comprehensive in the industry.
For most accounting practice sales, it’s crucial to start the selling process as soon after tax season as possible. The best buyers start looking right after April 15. Wait too long and decreased competition will lower your selling price. Your results will suffer if you wait to begin the sales process for a traditional tax practice in December.
An exception to this rule would be specialty firms that are busiest at other times of the year. For example, audit firms that specialize in school districts typically are busiest in summer.
If you’re serious about maximizing the profits on your accounting practice sale, call us. Our firm is unique because Accounting Broker Acquisition Group only employs brokers who are CPAs with significant “Big Four” merger and acquisition experience. Our enormous database of interested prospects pairs the best buyers with the best CPA practices for sale.
Your future is too important to leave to chance. You need truly exceptional professionals in your corner.
The following extremely important information is highly relevant to any seller who wishes to obtain maximum value for their accounting practice sale.
Read our featured article, “Maximize Proceeds In Accounting Firm Sales” in the Journal of Accountancy
Click now: https://accountingbroker.com/articles/
Receive the Free Report: “12 Fatal Errors You Must Avoid When You Sell Your CPA Firm”
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Call or email now for free consultation to see what Maximum Value could mean to the sale of your practice: (800) 419-1223 Ext. 101