CPA Firm Value Builders and Busters

Now that tax season is in the rear-view mirror, many firms will think about M&A opportunities, so it’s a great time to focus on firm value.

When M&A players compute value, there are several attributes that typically become either value builders or value busters. Here are 10 factors to make your firm more attractive for a transaction—as well as healthier as a business.

5 Value Builders

1. Desirable Niches. CAS, high-net-worth tax, forensics, data intelligence, international tax, and state/local tax are some of the hotter niches that will juice up value.

2. Above Average, Normalized Profitability. A crucial adjustment will be made when valuing firms where partners and staff work above average hours. Once this adjustment is applied, those firms with above average profit will be valued more favorably.

3. Geography That Feeds an Existing Presence or Opens a New One. Firms in markets that are on acquirers’ radar screens will bring more value. Presenting a case for your market—even if it is already a desirable one—can only enhance valuation.

4. Clients That Buy More. Growth in services paid for by existing clients carries a lot of clout. The stronger the trend, the more positive the attention.

5. Marquis Clients. Premiums will be attached for large clusters of “A” clients”—those known in their communities, pay good fees, and provide referrals.

5 Value Busters

1. Poor Leadership Demographics. If many of your leaders are looking toward retirement in a short time frame (3 years or less)—or if you have insufficient next-gen bench—potential acquirers may walk or under-value. Work on succession now.

2. Declining Revenue. Suitors want a healthy firm with a long-term track record (a 3-year window) of profitable growth.

3. Compliance-Heavy Portfolio. Tax return and financial statement mills are not as desirable as a firm showing financial upside in specialty services.

4. High Staff Turnover. This may speak to firm culture, clients, leadership, development opportunities, or workflow processes. Potential acquirers will spot this issue early and use it as a litmus test.

5. Below-Market Performance. Firms with profit margins, effective billing rates, AR and WIP turns that are 15% or more below the average for the market are going to be “dinged.”

There are many factors that go into computing value. The ones noted move the needle. Whether you are a buyer or seller, concentrate on the matters that move the needle in a positive direction.