How to Value an Accounting Firm for an External Sale

Are you thinking about selling your accounting firm to an external buyer? It's a big decision, and one of the most important steps in the process is figuring out how much your ownership interest is worth. But determining the value of your firm can be a complex task, with many factors to consider.

First off, the amount of cash upfront that the buyer is willing to pay is a key factor in determining the value of your ownership interest. Down payments typically range from nothing to 20%, with a typical down payment of 10%. The buyer's ability to get a quick return on investment will also play a role in the terms of the sale.

Another important consideration is the retention period. In most cases, payments for external accounting firm deals are based on collections. This means that the buyer pays a specified percentage of the fees it collects for a set period after the deal closes. The length of the retention period can vary, but most deals are structured with payments based on a percentage of collections over the entire payout period.

The profitability of your firm is also a factor that can affect the value of your ownership interest. In some cases, a smaller firm with little overhead may be worth more to a buyer than a larger firm with more staff and lease obligations.

Lastly, the duration of the payout period will also be a factor in determining the value of your ownership interest. Most deals have a payout period ranging from three to 10 years, and most do include added interest. Smaller firms typically get paid in four to six years, while larger firms can have longer payout periods. If SBA is financing a deal, you’ll receive more money up front but the Buyer will pay the loan over the following 10 years.

It's a lot to consider, but with careful analysis, you can make an informed decision about the value of your firm and set yourself up for a successful sale to an external party.