Do the math and don’t be afraid to pay more or ask for more.
By Marc Rosenberg, CPA
Partners in accounting firms are familiar with the rule of thumb that a CPA firm’s goodwill is worth one times fees; however, like many other “rules of thumb,” this notion is often incorrect.
When buyers begin to think about how much they will pay for a smaller firm, they often have the “1 x fees” concept in mind. Then, when sellers are bold enough to ask for a price in excess of one times fees, buyers often balk because they feel that the asking price is too rich.
7 Responses to “A Startling Revelation: 1 Times Fees is a Steal”
Susanna Jessup
As a small firm myself, I have managed to keep us up to date technology wise, equipment and procedures. We have been paperless since 2001 and moved to the cloud to do business seven years ago. Not all small firms are behind the times.
Frank Stitely
I read the white paper and I question the assumption of 5% annual growth. It seems to ignore any natural attrition in the early years from the merger / purchase. This is why people do earn outs instead of up front purchases. An earn out at 100% of annual collections spread out over a period of years – say 25% over 4 years makes more sense. Then I can buy the 1 times revenue multiple because it’s then really a collections multiple.
Jody Padar
You are assuming someone wants to buy a legacy out of date firm with legacy technology and process. Most of today small firms aren’t worth it 1X. They haven’t made any changes in 5+ years on how they do business. It’s a NEW world and I don’t need to purchase what I can organically steal.
Spiro Leunes
Funny, I never met a CPA owner who didn’t believe they had a “good firm.” With the coming deluge over the next 20 years of CPA firms that will be for sale because of retiring baby boomers, 1 Xs gross will will be a premium.
Rick Telberg
You guys are right. For all the detailed spreadsheet analysis, check out the free white paper at http://cpatrendlines.wpengine.com/free-white-paper-one-times-fees-is-a-steal/
Clay
Can’t trust you on this. Without more meat on those bones, this is just hype to attract sellers to your service.
monty
there are so many critical assumptions, care to share the details?