Maximize Proceeds in Accounting Firm Sales

Common misconceptions can cost CPAs dearly when they sell a public practice. Fortunately, better options are available. The largest asset for many CPAs is their ownership interest in an accounting firm. Unfortunately, CPAs often agree to sell their practices completely unaware that they may have misconceptions about the firm's potential market value and the optimal deal structure from a seller's perspective. These misconceptions can cost CPAs significant amounts of money--both at the closing table and over the course of the deal. It's a painful scenario, especially for CPAs who are counting on the sale proceeds to fund their retirement. Fortunately, CPAs have alternatives to deal structures and price-determination methods that favor the buyer. This article, which is based on lessons learned negotiating hundreds of CPA practice sales on behalf of sole practitioners, partnerships, and larger firms, rebuts many of the myths about such deals and examines options that can result in sellers' receiving substantially more money. ADDRESSING CPA FIRM SALE MISCONCEPTIONS Misconception: A CPA firm's purchase-price valuation should be based on a multiple of 100% of the practice's recent historical annual billings. Several approaches can be used to determine a business's sale price. However, selling an accounting practice based solely on a 100% multiple of revenue ignores the wide range of differences in profitability from firm to firm. In most other industries, middle-market businesses are often valued at a price calculated as a multiple of earnings (net income or loss) before interest, taxes, depreciation, and amortization (EBITDA). In addition, small businesses are often valued and sold at a price that equates to a multiple of the seller's discretionary earnings (SDE), which can be defined as EBITDA plus owner's compensation and benefits and other discretionary expenses, or "add-backs." SDE attempts to define the recent historical annual pretax benefit that a seller has derived from the practice on a cash basis. Single-owner CPA practices and small partnerships are most often classified as small businesses based on the typical level of annual billings for those firms. CPA firms with high SDE as a percentage of revenue are inherently more desirable to buyers than firms with low SDE, assuming all other variables are essentially equal. Buyers' preference for high-SDE firms can best be explained by the following example. Imagine that two hypothetical single-owner CPA firms with $750,000 in annual collected billings perform similar services in relatively the same geographic location. One firm has low billing rates, is managed poorly, and produces annual cash-basis SDE to the owner of approximately $75,000 (a scenario I have seen). The other firm has high billing rates, is managed exceptionally well, and produces annual cash-basis SDE to the owner of approximately $350,000 (a scenario I have seen). A rational buyer would likely choose to purchase the firm with the higher SDE, assuming all other variables between the two firms are equal. As a result, high-SDE firms generate significantly greater demand. The greater intrinsic demand for high-SDE firms can often produce sale prices significantly higher than 100% of billings for those practices. I have seen the SDE approach result in hundreds of sales at 100% to 150% of billings and numerous others at 150% to 200% of billings, including in the past 12 months. Be aware that SDE is not the only variable to consider when evaluating a CPA practice. Other considerations include, but are far from limited to, the location, the type of work performed, the number of hours the seller works, staffing, and industry and/or client concentrations. Still, SDE is often a much better predictor of CPA firm price than annual billings, due to large variations in profitability from firm to firm. …

Field of study: Business