Selling Your CPA Practice: The Guide to Maximizing Your Profits
November 30, 2023 •Oak Street Funding
There are many reasons you may consider a sale of your CPA practice. It could be that you’re ready to retire and want to be reimbursed for your years of growing the business. Maybe your goal is to gradually transfer ownership of the practice to your partners or professional staff.
No matter why you're considering the sale of a CPA practice, it's important to understand everything that's involved and the steps you can take to ensure you receive the greatest value for your business. We'll explore the many facets of selling a CPA practice and provide practical guidance based on our experience of working with other practice owners.
Table of Contents
1. Understanding the market for CPA practices
Understanding the market for CPA practices
If you haven’t investigated what’s involved in the sale of a CPA practice, you may be surprised at the number of potential buyers in today’s market. Some may already have practices in your area or a nearby community and are seeking to expand their business footprint. Others see acquiring another CPA practice as a way to staff up quickly and pursue larger and more involved clients. Sometimes, large regional firms are seeking to create or strengthen a foothold in particular geographic areas, and acquisition gives them an instant presence (and often, trusted local leadership).
Evaluating the value of your CPA practice
If you’ve been thinking of selling your CPA practice, the most important thing you need to know is what the practice is worth. As someone who frequently works with business valuation issues, you may have a rough idea, but what you need to know is what potential buyers will be willing to pay for it. With an accurate valuation, you’ll be able to make informed decisions that will help you maximize the return on your investment.
While CPAs pride themselves on delivering objective advice and accurate valuations to their clients, they’re often not as objective when it comes to the value of their own practices. The actual value of your practice in the marketplace is impacted by a variety of other factors and the method used to determine the valuation.
What is the basis of a CPA practice valuation?
Two similarly sized CPA practices in the same market could have wildly different valuations because many different factors weigh into the value of your practice, including the top three:
- Location. CPA practice buyers want to purchase practices that are either in their market areas or complement their existing markets -- such as expanding into an adjoining area.
- Size. Buyers tend to have more interest in large practices with bigger teams and more revenue. Other buyers specifically target smaller practices because they’re more affordable.
- Health. CPA practice buyers want firms with clear profitability, consistent cash flows, and healthy operating ratios.
While valuations of CPA practices can be complex, they’re usually rooted in either multiples of the practice’s net cash flow or based on one-time gross revenue. Under the latter method, buyers are willing to pay up to a certain amount for each dollar of the practice’s revenue in the most recent fiscal year.
Preparing your CPA practice for sale
With CPA practice sales, nothing happens quickly. The most successful transactions tend to be three to five years in the making. First, the transactions themselves tend to be complex, involving a significant amount of due diligence. Arranging financing for the deal may also consume more time than expected.
Once you've decided to sell your CPA practice, you probably want to take steps to increase its market value. That may include investing in technology to streamline your operations or bring your business practices up to contemporary standards, it could involve adding highly desirable practice areas or bringing on additional professionals, or it might take recasting your practice into what current buyers find most attractive.
Beyond determining the desired timeframe for your CPA practice sale, you need to be honest with yourself and the reasons you’re selling. Sometimes, CPA practice sales fall through because the owner realizes they really don’t want to give up control of the practice they’ve worked so hard to grow or realize they’ll miss their clients. Others assume they’ll continue to work after the transaction, but learn the buyer has no intention of keeping them on the team. Take time to consider your objectives and concerns before you move forward.
Finding potential buyers for your CPA practice
Once you’ve decided to proceed with selling your CPA practice, you need to find someone interested in buying it. Many CPA practice owners begin by having conversations with their counterparts at other CPA practices in their market. But limiting your search for buyers to your own professional network typically results in a far too small pool of potential buyers. If you’re able to find multiple buyers who are interested in acquiring your CPA practice, you’re likely to command a higher price.
Some practice owners turn to so-called business brokers to broaden their efforts to find buyers, but that approach may be unsatisfying. Accounting is a specialized profession, and a business broker may be more accustomed to selling retail stores or automotive quick-service franchises. They may not understand the subtle differences among CPA practices.
An easier and more affordable option is to use Oak Street Funding’s Exchange. It’s a clearinghouse for owners interested in selling their CPA practices and people who are in the market to buy practices. There’s no cost for setting up your own profile with information about your CPA practice … and no cost for prospective buyers to look at your listing.
The OSF Exchange allows prospective buyers to search by geography. If they spot a potential acquisition, they can review the posted information and request details from Oak Street Funding to begin the acquisition process. If a buyer is interested in your practice, you can use the Exchange to review their information, too. Both buyers and sellers can sign up to receive alerts as new buyers or sellers enter the marketplace.
How to use our Exchange pages
The OSF Exchange is as easy to use as an internet search engine. Whether you’re buying or selling, you simply include the requested information and set the geographic and other parameters that matter to you. The Exchange will automatically generate a list of available buyers or sellers who meet your specifications. You’ll be able to:
- List your practice for sale and receive listing alerts regarding activity on your listing, and
- Search buyer profiles
Negotiating the sale of your CPA practice
There’s no simple answer as to how best to negotiate the sale price for your CPA practice. You may be able to find insight from data for recent sales of similar practices in similar markets. Money isn’t the only factor you’ll want to consider. You’ll want to think about your current team’s satisfaction and what their work lives will be like after the sale. A buyer who plans to replace them or views them merely as a source of income may not be the best choice.
The same is true of your clients. You probably consider some of your clients to be close friends, and you don’t want to see them neglected by new owners. That’s why it’s important to get to know the buyer’s business culture before moving forward with a transaction. If your values and approaches are similar, the chances of positive outcomes are much greater.
Legal and financial considerations when selling your CPA practice
Because CPA practices are required to comply with the rules of government bodies and regulatory agencies, it's important to address those situations as you begin and proceed through the sale process. The prospective buyer needs to be made aware of how your practice structures employee compensation because it's not unusual for different team members to be compensated in different ways.
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Transitioning your clients to the new owner
A key component of successful CPA practice transactions is developing a transition plan for clients (and employees). Apprehension is a normal human response to the uncertainty associated with any kind of change. Clients have trusted you but may not know anything about the practice’s new owners. Employees are going to have similar concerns. Thinking through the concerns of both groups and devoting extra efforts to communication is the best way to put people’s minds at ease.
Maximizing your profits from selling your CPA practice
Once you’ve decided to sell your CPA practice, your primary goal should be to increase its value, so you come away from the transaction with the optimal level of proceeds. There are several things you can do to accomplish that, including:
Invest in Your Future
Focusing on your own exit doesn’t mean your practice will cease to be. But it demands recognizing that our profession is changing more rapidly than ever, and if you want your firm to be worth as much as possible on the date of the sale, make sure you and your team continue to keep up with both industry knowledge and the latest technology.
Bolster practice’s online presence
As more business shifts online and clients seek business services such as those your practice offers through search engines, your online presence becomes increasingly important. Simply put, you can’t afford to lose ground in cyberspace.
Develop strategic partnerships
Strategic partnerships with other professionals benefit your CPA practice in two ways. First, they expand the scope of the counsel and services you’re able to offer your current clients. Second, your strategic partners can become a great source of high-quality referrals for new clients.
Optimize financial performance
Is your practice operating as efficiently as it could? Approach your practice as you would a new client and look for ways to improve its financial performance, whether through the adoption of new technologies or upgrading how your team does things.
Leverage technology to automate processes and improve efficiency
Successful CPAs recognize automation’s potential to transform both the profession and their firms. Many CPAs actually embrace new technology because it replaces manual tasks often perceived as drudgery (like recordkeeping and tax preparation) and allows more time to focus on strategic roles such as risk management and auditing.
A key advantage of automation is its ability to level the competitive field. The ever-shrinking cost of innovations allows smaller CPA practices to offer sophisticated services that were once the province of industry giants. Those services can be especially helpful when it comes to client retention. As your clients’ businesses become more complex, they’ll appreciate knowing the professionals they already trust can offer the capabilities they need.
One of the biggest benefits offered is the amount of time automation can save. When your team uses technology to automate previously time-consuming tasks, you can use more of your day to focus on higher-value work, leading to substantial increases in margins. In addition, you’ll be able to respond to client requests more quickly, while improving your operating efficiency ratio.
Automation also improves your ability to make decisions and issue recommendations to clients. Using technology to leverage and analyze today’s wealth of data can improve both your access to insight and your confidence in applying that insight to client needs. That makes you a more valuable strategic partner as your clients pursue growth opportunities. By keeping yourself and your team up-to-date, you’ll protect client relationships.
Funding the purchase of a CPA practice
Many potential buyers of CPA practices believe the best approach is to obtain financing from a local commercial bank, but most commercial banks are more comfortable with collateral-based lending than with transactions structured to create future revenues. When lending for non-collateral purposes, banks may tack on additional requirements such as personal guarantees that place your personal assets at risk.
Oak Street Funding is Here For You
That’s why a growing number of CPAs rely upon specialty lenders like Oak Street Funding to fund their transactions. Our lending approach is based on future cash flows, so it’s ideally suited for helping professionals like you turn goals into realities. To learn more about our approach and how it can help you, talk with one of our loan officers.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.