If you are valuing a CPA practice, consider using the tried and true tools – valuation multiples derived from the sales of comparable accounting practices, classified under SIC code 8721.
The advantage of taking this market approach to an accounting practice valuation is twofold:
- It offers highly defensible evidence of the current selling prices for CPA practices.
- It captures the risk including the important industry and firm size risk premia as well as the discount for lack of marketability.
Top valuation multiples used for CPA practice appraisals
While there are a number of economic and accounting bases you can use to estimate the CPA practice market value, most acquisitions are priced using just a few valuation multiples:
The first valuation multiples are by far the most common ones. In fact, the coefficient of variation for the Price to Net Sales valuation multiples is just under 0.27 which is less than 10% that of the EBIT based number.
This indicates that the variation of the CPA practice selling prices around the mean is much smaller when the net sales basis is used. Put differently, your peers tend to trust the revenues a lot more as the basis of pricing an accounting practice acquisition.
Earnouts are a frequent element of the CPA practice purchase deal structure. This is especially so for firms that tend to rely on tax preparation as the main source of income.
A typical hold-back period is one year but can be shorter for accounting firms with substantial value-added services to help smooth out the hectic tax preparation season – and the practice’s income stream.
Example – CPA practice value estimation using multiples
Consider a practice generating $500,000 in annual client billings. A reasonable current valuation multiple is 1 times the revenues. This gives us the business market value for the practice of $500,000.
By convention, the value estimate includes the practice tangible assets, goodwill and other valuable intangibles such as the client lists. Liquid assets and practice owned real estate are extra.
Other methods for CPA practice appraisal
If you are handling the valuation of a small accounting practice, consider the Multiple of Discretionary Earnings business valuation method. A well-known variant of the direct capitalization valuation methods under the income approach, this technique is an excellent way to value a private accounting firm based on its earning power and a number of key financial and operational performance factors.
Business goodwill can be a large portion of the overall CPA practice value. The Capitalized Excess Earnings valuation method is a proven way to determine the value of practice goodwill. Known as the Treasury method, it has been described in the Internal Revenue Service Ruling 59-60 and 68-609.