Putting a price tag on something you’ve built from the ground up can feel reductive. But as a firm owner, knowing the worth of your tax and accounting practice ensures you pass it on to the right hands and get a fair deal come exit time.
Even if succession plans or acquisitions aren’t on your radar just yet, recognizing the attributes that create value in your practice can guide your strategy for lucrative growth. Below, we outline different valuation methods to help you get started.
How to Value a CPA Firm: Proven Methods
CPA practice valuations typically combine multiple methods to determine a reasonable value range. Each method offers different insights into your firm’s worth.
Multiple of Gross Revenue
This approach applies a multiplier to your firm’s revenue for the last 12 months, based on recent sales of comparable businesses.
The predominant multiple is one times annual revenue, but factors like firm location and service offerings can influence it.
However straightforward, this method doesn’t account for differences in profitability. Even if two accounting firms have identical revenue, they could very well have different profit margins and efficiencies.
Multiple of EBITDA
Another method is to apply a multiplier to your Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
For accounting practices with $100K to $1M revenue, multiples typically range from 1x to 1.5x, while those with $1M to $10M in EBITDA can go from 3x to 11x.
EBITDA represents the cash flow from your CPA firm’s core operations when stripped of financial variables like interest expenses. In excluding such subjective factors, this method better accounts for profitability differences.
Discounted Cash Flow
The Discounted Cash Flow (DCF) method estimates the present value of an investment (in this case, your accounting firm) based on forecasted future cash flows and a discount rate.
DCF considers the time value of money, which assumes your money today might be worth more tomorrow due to its earning potential.
This approach involves:
- Estimating cash flows for the next five to ten years
- Determining a terminal value or the cash flow beyond the forecast horizon
- Applying a discount rate, either the cost of equity or the weighted average cost of capital, to each projected cash flow
- Subtracting the initial investment cost from the sum of discounted cash flows —if DCFs exceed the present cost, it’s a profitable investment
DCF requires detailed financial analysis but offers great insights into your CPA firm’s intrinsic value.
Asset-Based Valuation
While less common for service businesses like accounting firms, the asset-based method appraises both tangible assets (furniture, equipment, leasehold improvements) and intangible assets (intellectual property) at their market value. You then calculate your firm’s value by subtracting its liabilities from the total asset value.
How Deal Structure Affects Final Sale Value
Your payment structure determines the risks and rewards you and your buyer share.
If you negotiate an earn-out, the buyer pays a down payment, and you receive the rest at certain milestones. However, you take on a higher risk since you’re still tied to the CPA firm.
Consider these factors:
Upfront Cash Investment
Down payments for straight deals range from 0 to 20% of the selling price, with 10% being typical. This figure also depends on the following:
Timing: How quickly your potential buyer can obtain a return on their investment influences how much they’re willing to pay upfront.
For example, if you bill your revenue shortly before closing a deal, your buyer will likely inherit the practice at breakeven. Consequently, they will give you a lower down payment.
Accounts receivable: If you plan to keep the money you’re owed for work completed and in progress, which is understandable, your buyer will have to replace those funds.
If their acquired clients are slow to pay, the buyer may have to wait months before seeing revenue come in. These factors also lead to lower down payments.
Bank financing: If a transition requires investments, buyers may pay less upfront since banks have made obtaining credit for acquisitions increasingly difficult.
Retention Period
Profitability
The buyer’s expected profits and the seller’s multiple increase if the absorbed practice has little or no overhead costs. After all, the amount paid to the seller ultimately depends on the buyer’s success in retaining clients.
Payout Period
The payout period is the timeframe in which the seller receives the total sale payment. Smaller firms tend to have five-to-seven-year deals, while larger firms have longer payment terms.
In general, less money upfront means longer retention and payout periods, allowing for greater, positive cash flow. A higher down payment, on the other hand, results in shorter retention and payout periods.
Factors that Influence How Much Your CPA Firm is Worth
Several factors can increase or decrease your firm’s worth. These considerations are important whether you’re gearing to sell or just starting an accounting practice and want to build value from day one.
- Location
Where your CPA firm is located affects its marketability. Being in highly urban areas exposes you to a larger, more diverse workforce and client pool, but it also means higher operating costs.
Conversely, firms in rural areas aren’t as expensive to maintain and attract a loyal client base due to less competition. Both contexts can enhance your valuation.
- Financial Performance
Individuals looking to buy an accounting practice want guaranteed revenue and growth. That’s why firms with recurring services (monthly accounting, quarterly reviews, annual tax preparation) command premium valuations.
Likewise, firms with balanced portfolios across accounting, audit, and advisory services tend to be more resilient to market shifts. Add industry specialization into the mix and you create differentiation that supports better client retention and positive net cash flow.
- Client Base Characteristics
High client retention rates indicate stable future revenue. In the same vein, longer client tenure suggests service satisfaction, which may mean lower transition risks (clients following their accountants during ownership changes).
Be sure, however, that your firm is not reliant on a small number of clients to generate your total revenue. Otherwise, you risk instability when those clients terminate the relationship.
Your client base should be diversified and include businesses that are financially healthy and are in growth industries.
- Operational Efficiency
Another indicator of sustainability is your CPA practice’s operational metrics:
- Realization rates – The percentage of actual billable hours charged to clients can suggest effective pricing. If your firm has poor realization rates, investors and buyers will suspect pricing or service delivery issues.
- Utilization rates – Achieving your target billable hours per accounting staff highlights your competence in staffing allocation, which supports workflow sustainability.
- Technology integration – Firms with a cohesive tech ecosystem create operational efficiencies that enable scalable service delivery.
- Standardized processes – When you pair a robust tech stack with proper documentation, you reduce reliance on individuals while ensuring consistent service quality.
As any experienced CPA practice advisor will tell you, operationally efficient firms are more attractive to potential buyers because they signal clearer paths to integration.
- People and Culture
Beyond how your accounting firm operates, investors and buyers also consider the strength of your team and organizational culture.
Experienced and tech-savvy employees who can maintain client relationships without relying on founding partners will fetch you a higher valuation.
So, cultivate a work environment that attracts and retains these talents. Take the time to align salaries with industry trends and promote professional development programs.
- Buyer-Seller Compatibility
Tips for Valuing Your CPA Firm
1. Normalize Financial Performance
- Standardize owner compensation to market rates
- Remove personal or discretionary expenses
- Adjust for non-recurring items
- Account for differences in office space costs (owned vs. leased)
- Standardize firm investments in marketing, technology, and staff development
2. Assess Non-Financial Metrics
- Client retention statistics
- Staff retention and satisfaction measures
- Service mix and recurring revenue percentages
- Capacity utilization and realization rates
- Technology integration levels
3. Work With an Expert
As a firm owner, you’d want the best price from the right buyer. Consider engaging a business appraiser with accounting practice sales experience to identify blind spots in your analyses.
If you find it difficult to separate emotional investment from economic reality, which can happen to most, consulting with merger acquisition advisors focused on accounting can provide the necessary objectivity. They also ensure cultural alignment with the potential buyer, facilitating a seamless integration post-close.
Maximize Your Firm’s Value with Global Talent
Many data points contribute to your firm’s overall profit and price tag. At the technical level, accurate and reliable financial information is required for precise income statements, which will be evaluated by potential buyers.
Investing in automated accounting systems and working with trusted accountants who can make the most of such systems can keep your financials up to date to ensure accurate valuation analysis.
At TOA Global, our US-trained offshore accountants maximize practice value through operational efficiency. By delegating routine tasks to them, you can focus on growth and client activities, ultimately enhancing your profitability.
Discover how our expertise can help you build a more valuable practice. Talk to us today.
