Selling a CPA Firm: What's the Right Multiple?

Source: Journal of Accountancy

Authors Joel Sinkin and Terrence E. Putney discuss methods of valuing a CPA firm for sale. For external sales, four main factors determine the appropriate multiple of billings:

• Cash up front, if any. The amount depends on factors such as the time of year (will the buyer have to carry the practice at a net loss for a time?), the treatment of accounts receivable (will the seller retain its receivables?), and the availability of bank financing.
• Retention period. Most external sales involve a retention period, during which the purchase price balance is adjusted based on client retention and collections.
• Profitability. This refers to the buyer's profitability, given the way the deal is structured.
• Duration of payout period. Generally, the period ranges from three to 10 years. For smaller firms, four to six years is typical. Larger firms usually have longer payout periods. 

Generally, the less money up front, the longer the retention and payout periods; the more profitable the structure for the buyer, the higher the multiple. Also, higher quality firms and firms in larger cities tend to enjoy higher multiples. For example, the authors have seen small firms in cities such as New York sell for as much as 1.25 times billings, while firms in more remote areas struggle to obtain one times billings. 

Large firms usually receive lower multiples and longer payout periods because it's impossible to absorb a $10 million firm, for example, without substantially increasing overhead. “[S]maller firms tend to yield a higher percentage of profit to the bottom line than larger firms.” 

For internal transfers, similar factors come into play, but multiples tend to be lower. One times billings remains popular, but more than half of internal transfers use a multiple lower than one. 

For the complete article, read “How to value a CPA firm for sale.”

From Journal of Accountancy, November 2013, www.journalofaccountancy.com/Issues/2013/Nov.