If you’re an independent chartered professional accountant (CPA) in the Greater Toronto Area who is looking to sell, you will want to know what your accounting practice is worth. You will want to know what the market is actually willing to pay for your accounting firm – not just what you think your practice is worth so you can set reasonable expectations and plan accordingly.
Five common factors that impact the valuation process of your accounting firm include:
1. Cash Up Front: The amount of the purchase price paid at closing depends on such factors as the time of year your sale closes, the practice’s anticipated cash flow, treatment of accounts receivable and the seller’s work in progress.
2. Guarantee Period: The majority of practices sold include a guarantee period that adjusts the balance the seller receives according to client retention rates and fees. The period can range in duration from one tax season to the entire payout period.
3. Potential Profitability: A buyer will base the value of the acquisition on your firm’s expected profitability, incremental overhead, tax ramifications, potential cross-selling opportunities and the talent of key staff members.
4. Payout Period: In general, the longer the payout, the lower the monthly payment and the greater the cash flow. Payout periods may range from 3 to 10 years.
5. Multiple: The multiple is the result of the first four variables. The longer the payout and guarantee periods, the more profitable the deal is for the buyer. The lower the amount of cash at closing, the higher the multiple.
Knowing these factors will help you to decide whether to sell your accounting firm soon or wait until you can achieve results that will allow everyone to win.
What Buyers Really Want – and How to Deliver
Beyond the common factors that impact the valuation process, potential buyers of accounting firms look for other benefits. These benefits include the sum of collected billings, recurring work, profit per hour worked, steady growth rates, high margins, a broad customer base, and well-defined systems and processes.
In general, the most saleable general accounting practices are sole proprietorships with annual billings between $50,000 and $250,000.
In response, you should identify and articulate the true value drivers in your business. To give prospective buyers peace of mind, formalize your business systems and processes for a smooth transition and help buyers feel confident the business will survive. Also, seek the help of an experienced tax advisor to minimize the immediate and future tax implications for all key parties.
In today’s market, a general accounting practice in Toronto with $150,000 of recurring billings might sell on the following terms:
- Selling price for practice goodwill of $150,000, or “one times annual billings”
- An upfront cash payment of $40,000, with the balance payable quarterly over three years at no interest
- A downward price adjustment for clients lost in the first year following the sale
- If the practice is incorporated, a share sale. The price attributable to practice goodwill will be discounted by $10,000 to $15,000 for lack of tax shield.
Take the Next Step
To find out the value of your accounting business in the Greater Toronto Area, contact Sloan Partners LLP, a mid-sized Toronto-based accounting firm with proven experience in providing accurate valuations for accounting practices. Contact us today to start preparing the future you want.
You can also download our free “How to Sell Your Accounting Practice” eBook to read more tips on how to get the best value for your business and create a successful exit strategy.