M&A: Pricing the Small CPA Firm

Source: CPA Trendlines

The following includes excerpts, reproduced with permission, from a white paper by Marc Rosenberg.

Partners in accounting firms are familiar with the rule of thumb that a CPA firm's goodwill is worth one times fees; however, like many “rules of thumb,” this notion is often incorrect.

When buyers begin to think about how much they will pay for a smaller firm, they often have this one-times-fees notion in the back of their minds. Then, when sellers are bold enough to ask for a price in excess of one times fees, buyers often balk because they feel that the asking price is too rich.

The purpose of this paper is to demonstrate that buying a small firm for one times fees is a steal (for the buyer). In fact, it's still an outstanding investment at a premium price, say, as high as 1.3 times fees.

There is a critical caveat: The buyer must be able to earn respectable profits from the revenues acquired. If this is not the case, then it's probably not a good idea to pay a premium price.

In the paper, Rosenberg provides an example in which the buyer of a small firm pays one times fees and enjoys a 49.5 percent return on its investment.

To download the white paper, read “A Startling Revelation: 1 Times Fees is a Steal.”

From CPA Trendlines, December 16, 2016, cpatrendlines.com.