CPA firms are one of the most stable business models in the United States and have a more challenging barrier to entry than most industries. This means many established CPA firms have an excellent opportunity to sell for fair market value (or above fair market value). In this guide, we discuss the current state of the CPA industry, how to determine the value of your CPA firm, and the sales process.
About The CPA Industry: What Are The Numbers?
The CPA industry has shown substantial growth and remains strong. The fact is annual taxes will always be an obligation. This provides reliable growth and sustainability for CPA firms. It also allows for a predictable business model that sees substantial revenue before tax season and less work after tax submissions. Consequently, many firms operate seasonally. Regardless, firm owners have flexibility and control over their business in a manner other industries do not. As it pertains to the size of the CPA industry, growth, and projections, here is the most recent data (provided by Business Reference Guide):
- There are approximately 90,000 CPA businesses in the U.S. (a 0.3% increase from 2022)
- There was a 3.4% annual growth for the CPA industry from 2018 to 2023
- The CPA industry generates $141.8 billion in annual revenue
- The annual profit for the HVAC industry is $25.9 billion
- Experts predict a slight increase in annual growth (0.4%) from 2023 to 2028
Business Valuation: How Much Are CPA Firms Worth?
Your CPA firm may already deal with business valuations. It may even be one of your primary services, along with analyzing financial records, preparing tax returns, creating budget reports, and conducting internal audits for your clients. Therefore, you likely understand the importance of acquisition multiples. As business brokers, we utilize rule of thumb data along with other key considerations when we determine your firm’s value (see below). Rule of thumb data for CPA firms is as follows:
- CPA firms sold between 2.04 to 2.92 times the Seller’s Discretionary Earnings (SDE)
- CPA firms sold between .96 and .98 times the annual net sales
- CPA firms sold between 2.91 and 4.92 times the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
As can be seen, the rule of thumb data for CPA firms widely varies. Consequently, rule of thumb data (and financial records) do not always provide a precise or entirely accurate depiction of the firm’s worth. Instead, other factors play a key role for many firms, such as those discussed below.
How is My Business Valuation Determined?
CPA firms deal with financial statements and reports regularly — one of the primary factors in determining the worth of a company. However, although the financial data is the primary indicator of your CAP firm’s worth, there is much more than goes into an accurate business valuation. For example, experienced business brokers such as Sigma Mergers and Acquisitions look beyond the numbers to fully understand how much prospective buyers are willing to pay. Along with profit history and other key financial indicators, your business valuation should also include your:
- Unique selling proposition (USP)
- Growth potential
- Diversity of customer base
- Quality of existing workforce
- Existing operating procedure
- Condition and quality of equipment
- The purpose for selling the firm
This is not to diminish the importance of financial data such as your seller’s discretionary earnings (SDE), cash flow, or earnings before interest, taxes, depreciation, and amortization (EBITDA), but there is more to a valuation. Additionally, CPA firms have a relatively high barrier to entry; this helps the value of your firm as it is less likely that new competitors steal a portion of your existing (and projected) market share.
Pricing Tips for CPA Firms
Pricing is one of the most important aspects of selling a CPA firm. A proper valuation can ensure you do not sell your firm below fair market value and helps avoid overpricing your firm and subsequently not receiving any offers. Here are the most notable pricing tips for CPA firms:
- Consider your geographic location when you determine the fair market value
- Apply a multiple between .75 and 1.25 times gross recurring revenue to receive a tentative valuation
- Use the high end of the rule of thumb if you have a cash flow margin greater than 50%
- The multiple is lower for rural areas and higher for metropolitan areas
- Location, services, and SDE are major factors in determining the value of your CPA firm
It is important to remember that these are general pricing tips for CPA firms. It is important to receive personalized advice from a business broker before selling your CPA firm.
What Steps Are Involved in The Process?
The first step in the sales process is to consult with a business broker who has experience with CPA firms (or similar business types). They can provide you with an objective business valuation. If the valuation allows you to reach your financial goals for sale, then you can list your firm on the market and find a buyer that is right for your organization. During this stage, your business broker should ensure the confidentiality of the process.
Once you find a buyer who provides a letter of intent, the due diligence process begins. This involves a detailed review of your CPA firm to confirm its profitability, review legal documents, etc. Lastly, the purchase agreement and other contract documents are signed and the business is transferred to the buyer.
Contact Us to Receive a Professional Business Valuation
Sigma Mergers and Acquisitions provides professional valuations for CPA firms. We also serve as your trusted business broker throughout the sale process. If it is not the right time to sell your CPA firm, then we offer consultancy services to help you improve your valuation and maximize your company’s worth. We have a passion for helping other business owners sell, and we have been through the sales process personally as well. To learn more and get started, schedule a consultation today.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
Feel free to reach out!