You’re probably not an owner.
By Marc Rosenberg
How to Bring in New Partners
There are two components to the value of a CPA firm: capital and goodwill, the latter of which is often stated as a percentage of the firm’s annual revenue. Capital is on the balance sheet; goodwill is not.
MORE: Why Buying Into a Firm Is Such a Great Investment | Four Philosophies for Managing a CPA Firm | Public Accounting as a Business, 101 | 16 Steps to Creating a Partnership Path | Six Ways New Partners Differ from Managers | The Four Essentials for Every New Partner | Tell Potential Partners What It Takes
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Here’s a crash course in CPA firm business valuations. Assume a firm with annual revenue of $10 million. Most firms have accrual basis capital of roughly 20 percent of their revenues, consisting mostly of WIP and A/R. If we value the goodwill at 100 percent of revenue (this used to be so common it was automatic; today it is still common but much less so), the total value of the firm is $12 million: $2 million of capital and $10 million of goodwill.
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