Warren Buffett said that accounting is the language of business. However, what about accounting as a business. As per research, there are over 50,000 CPA firms in America.
- Of these 90% of them have less than 10 employees and 40% of them are single-person shops.
- Over 50% of these firms are owned by baby boomers who have built their practices over a many years and retire. The problem is – why will someone buy his or her practice?
Let’s see what a professional CPA practice is worth…
In the last 20 years, CPA practices have had bittersweet experiences from two dimensions – software and outsourcing.
Software has helped CPA practice owners improve their productivity and reduce their risk.
However, clients are also allowed to manage their own books and taxes which reduce dependence on their CPA neighborhood. One software alone – TurboTax – has 67% of the personal tax preparation market.
Outsourcing to other countries has given CPA’s a hedge against software by improving their margins, but outsourcing has also allowed US businesses to hire accountants offshore to run their books and taxes.
Nevertheless, if you’re a CPA there are three things that attract buyers –
- Recurring revenue – one time or ad hoc revenue is almost worth nothing in this business. If you have clients who depend on your year after year for their accounting and taxes that is worth its weight in gold to a potential buyer.
- Location – practices in urban areas are worth far greater than practices in small towns or rural areas. Urban practices have access to client fertile surroundings.
- Technology – practices that embrace technology to scale and improve efficiencies are easy to integrate into larger practices and are favored by buyers. Tech is after all the wave of the future.
CPA practices used to sell for 1.5-1.75x on revenue. In the 1990s and 2000s when American Express, HR Block, and CBIZ were buying up practices like there is no tomorrow they were also paying 2x or even over for them. But now with the tax prep DIY software, most practices are not being sold for such high multiples.
- CPA practices can sell for 0.9-1.4x multiple on revenue.
- 1.1-1.3x is the mid-range.
- 0.9x is for practices in rural areas of with older clientele.
- 1.4x is for practices that have strong technology integration, in urban areas with younger clients, because these clients will (well, hopefully) stick with the practice longer.
But this is only a partial picture. There’s a proverb in business brokerage – You name the worth, and that I will name the terms.
Value is significantly affected on how much upfront payment the seller wants, and how much is she willing to finance or receive via earn-outs. The rule of thumb here is that the more upfront payment demand, the lower the value.
The key to valuing a CPA practice is to understand the difference between the value of the practice and the contribution of the professional based on individual relationships. If a practice is heavily dependent on the operator it makes it difficult for a new buyer to acquire and integrate into a bigger practice. Whereas, if a client-base is loyal to the brand of the practice, it is relatively easy to integrate into a bigger practice.
They say an accountant is someone who knows the cost of everything but the value of nothing. I hope this blog has helped you understand the worth of a CPA practice.