New Wrinkles in CPA Exit Strategies
Contrary to most predictions, the recession has not decreased valuations for accounting firms.
But sellers must be willing to agree to retention adjustments and smaller up-front payments, according to Joel Sinkin and Terrence Putney at Accounting Transition Advisors.
In addition, some deals are being consummated with little or no cash up front. But, the lower the up-front cash, the longer the payout period. So payouts are now running five to ten years.
The M&A brokers report that, in firms over $25 million, multiples are generally two to three times annual partner compensation, with payout periods ranging from seven to 12 years. And, at firms under $25 million, valuations are generally equal to the partner’s equity percentage times the firm’s revenue, typically in the range of 0.6 to 1.25.
For internal sales involving succession plans, Sinkin and Putney say buyers are more frequently requiring two years’ retirement notice to allow the value of a partner’s interest to be fixed at the retirement date. If adequate notice is not given, the payments may be subject to adjustment for actual client attrition.
Other considerations:
- Interest is not normally paid on the deferred payments.
- Typically, tangible equity (accrual basis) is added to the above valuations and paid out over the same time period as the intangible value.
- A cap on annual payouts is recommended, usually from five to 15 percent of revenues.
In addition, some retired partners are being encouraged to stay on, which helps with client retention, retains their skills, and can create growth opportunities for younger partners and retains.
via: CPA Practice Management Forum.
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I agree with your headline but we see a very different reality in the market of practices grossing less than $5,000,000.
Rick, as you know, I’ve been working in M&A for the CPA practice market for over 15 years and most partners/owners I talk to just assume that practice values are down because the stock market and real estate is down. But that is not our experience, valuations are holding firm.
For the typical practice out there it is still a seller’s market and certain banks are lending because CPAs are such good borrowers, so we are still seeing down payments of anywhere from 60-90%.
We have spoken to literally hundreds of firms that are delaying selling. Anyone wanting to sell before the tax season should get started now because there is such a strong demand from potential buyers.