Key Takeaways
  • Start with earnings adjusted for a market-rate salary for each working partner, rather than relying on a revenue multiple. A range based on those earnings can guide a sale decision, but it is not a formal appraisal.
  • Use client history and relationship ownership to assess whether revenue will transfer after the working partners leave. Fees tied closely to one departing partner may support a lower offer or a payment tied to client retention.
  • Compare offers from internal successors, regional firms, and private equity platforms by payment terms and your role after closing, not headline price alone.
  • Separate headline enterprise value from cash at closing. Debt repayment, retained equity, and payments tied to client retention can change the amount you receive upfront.

What “valuing your firm” actually means before a sale

To estimate a defensible preliminary sale range, adjust earnings for the cost of replacing working partners, compare the resulting earnings with relevant buyer offers or transactions, and test how much revenue could transfer without you. That range can help you weigh succession against a sale. It is neither a final sale price nor an estimate of cash at closing.

An informal sale range is not a formal appraisal or a calculation engagement performed under professional valuation standards. If you need a valuation for a tax filing, lender, or dispute, confirm the required report and standards with the party requesting it.

Salt Creek’s CPA advisor comparison briefly explains earnings-based valuation and deal structure. This guide shows you how to build an earnings estimate, assess risks specific to your firm, and separate a headline value from potential sale proceeds.

Start with normalized earnings, not revenue

A revenue multiple ignores how much profit a buyer can keep after paying people to run your firm. Two CPA firms with the same fees can have very different earnings if one relies on unpaid partner labor or carries higher staffing costs. Start with EBITDA, or earnings before interest, taxes, depreciation, and amortization. Adjusted EBITDA changes that figure for documented items, such as one-time expenses and the difference between recorded partner pay and the cost of replacing each partner’s work. Some CPA firm valuation discussions use net adjusted earnings instead. Check how each source defines earnings before comparing its multiple with one based on adjusted EBITDA.

Bob and Doug Lewis describe a net adjusted earnings calculation that begins with gross profit before equity partner compensation. They subtract the recorded partner compensation, then add back 40% of it. In that calculation, the remaining 60% stays in earnings as a labor cost. It is a feature of their method, not an estimate of what it would cost to replace your partners. For your firm, test that assumption against what it would cost to replace each working partner’s duties rather than treating 40% as a universal rule.

Next, review unusual expenses and payments to retired partners or acquired firms. Interest, depreciation, and amortization are already excluded from EBITDA, so do not add them back again. Add a cost back only if it reduced the earnings you started with and a buyer would not expect to keep paying it. Keep proposed savings on consultants, recruiting, technology, or overlapping staff separate from your firm’s adjusted EBITDA. A particular buyer may realize those savings, but another buyer may not.

Partner distributions are not a substitute for operating profit. Collecting unpaid invoices can change how much cash partners receive without necessarily changing the revenue recorded for that year. Check how your firm recognizes revenue and work in progress, then reconcile collections and receivables to the income statement. Review partner distributions separately because they may not appear as an operating expense.

Apply a multiple only after you have a defensible earnings figure. For each comparison, identify the earnings measure, firm size, service mix, client retention, buyer type, and payment terms. A quoted multiple may include deferred or conditional payments, so it may not describe the cash a comparable owner received at closing.

Set market-rate compensation for every working partner

Estimate the cost of replacing each working partner’s duties before treating any excess compensation as profit. Accounting Today’s discussion of net adjusted earnings treats equity partner compensation as a central valuation adjustment. For each partner, identify the work they perform, such as managing client relationships or overseeing staff, and estimate the full cost of replacing it, including compensation for duties that may need more than one person.

The adjustment depends on how your firm records partner pay. If a partner earns a $100,000 salary but a comparable replacement would cost $240,000, subtract the $140,000 difference from earnings. If the firm instead records $320,000 of salary for the same role and a replacement would cost $240,000, add back the $80,000 excess. Partner distributions recorded outside payroll require different treatment. They do not reduce reported earnings, so you must subtract the full replacement cost rather than add back the distributions.

Build each estimate from comparable roles and the duties that would remain after a sale. A fixed percentage of partner pay cannot replace an estimate of those costs.

Assess client retention, concentration, and transferable revenue

Client-level records help a buyer assess how much revenue may continue after you leave. Build a client-level history for several years, if your records permit, that shows annual fees, services purchased, tenure, and clients gained or lost. Compare tax and advisory clients using their actual renewal and fee histories rather than assuming either service produces recurring revenue. Review engagement terms as well, since a subscription label alone does not tell a buyer whether a client will renew. Berkshire Business Sales & Acquisitions’ CPA firm diligence guidance also recommends reviewing client and financial records.

Losing one large client can have a greater effect on earnings than losing several small ones. Calculate how much revenue comes from your largest clients, then ask who manages each relationship and whether another partner or staff member could take it over. Accounting Practice Sales recommends examining the prior year’s ten largest clients. A buyer may treat fees tied closely to a departing owner as less secure, even if those clients have stayed for years.

Clean financial records help a buyer test both client revenue and normalized earnings. Reconcile your client billing records to the general ledger, review unpaid invoices, and explain unusual changes in fees or collections. If billed revenue does not match the books or clients routinely pay late, a buyer has less reason to accept the earnings figure used in your preliminary valuation.

Weigh staff depth, succession plans, and owner dependence

A buyer will look for people who can keep the firm running after you leave. Review which managers can supervise work, retain staff, and take over client relationships. If one partner makes every major client decision, a buyer may ask that partner to stay longer or price in the cost of replacing their work. The buyer may also make part of the payment conditional on client retention.

Test owner dependence client by client. Note who leads each relationship, who reviews the work, and whether clients already know a likely successor. A succession plan carries more weight when staff have handled those responsibilities before the sale, rather than simply appearing on an organization chart. The risk deserves particular attention in a solo practice, where the owner’s retirement can leave no other partner ready to take over.

For audits or reviews, identify the licensed professionals who could take responsibility for engagements after you leave. The next section addresses the separate ownership and independence rules that may affect a sale.

Account for attest work and ownership rules

If your firm performs audits or reviews, its buyer needs to assess whether the proposed structure permits those engagements to continue under the applicable licensing, ownership, and independence rules. A buyer that cannot retain the attest work may value that revenue differently or need a different deal structure.

State rules can limit the buyer pool. The Illinois CPA Society’s discussion of alternative practice structures describes Illinois CPA-firm ownership requirements and explains why financial interests and voting rights matter. If Illinois rules apply to your firm, ask transaction counsel to confirm how they affect the proposed buyer and structure. Illinois is one example, not a national ownership rule.

One possible arrangement keeps attest work in a licensed CPA firm and places non-attest services in a separate entity. The AICPA’s discussion of alternative practice structures describes an ongoing ethics review of private-equity-backed structures and independence, not a final approval of any arrangement. Separate entities alone do not settle independence or client-conflict questions. Before counting attest revenue as transferable, ask transaction counsel and qualified independence professionals to review the current rules and affected engagements. Confirm licensing questions with the relevant state board.

Compare internal successors, regional buyers, and private equity platforms

An internal successor may need a longer payment schedule if the purchasing partners must fund the buyout from their own resources. Compare the resulting proceeds and payment risk with outside offers rather than assuming an internal transfer will have a lower price. In a 2015 discussion of CPA firm buyouts, Marc Rosenberg pointed to the limited internal buyer pool and partners’ conservative approach to long-term payouts. An internal transfer may avoid some costs of marketing a sale to outside buyers, though it can still involve advisory and legal fees. Rosenberg’s account helps explain the structure of an internal deal, but its figures are historical, not a current pricing benchmark.

A regional buyer may value your firm based on how well its clients and staff fit an existing practice. The buyer can consider whether its managers can absorb the work, whether clients will stay after your departure, and what it will cost to combine the firms. Even strong reported earnings may draw a lower offer if the buyer expects to hire several people to replace your role or sees a risk of losing major clients.

When comparing a private equity platform’s offer, ask how it values recurring revenue and whether it expects your leadership team to stay after the sale. Its headline offer may include rollover equity, which is an ownership stake you retain in the buyer’s business, or an earnout, which pays only if agreed results occur later. A regional buyer or internal successor can propose deferred payments too, so compare offers by cash at closing, future payment conditions, and the risk you retain, not the earnings multiple alone.

A hypothetical worked valuation

Consider a hypothetical CPA firm with $5 million in annual revenue and $900,000 in reported EBITDA. Every figure in this example is invented to show the calculation, not to suggest a market benchmark.

The firm paid each of its two working partners a $150,000 salary, which is already reflected in reported EBITDA. Assume your review documents $100,000 in one-time expenses and $50,000 in personal expenses that reduced reported EBITDA and would not continue after the sale. Assume replacing each partner’s work would cost $250,000 a year. Adjusted EBITDA would be $850,000.

$900,000 reported EBITDA + $100,000 one-time expenses + $50,000 personal expenses + $300,000 recorded partner salaries − $500,000 replacement compensation = $850,000 adjusted EBITDA.

To illustrate a range rather than suggest a market benchmark, apply hypothetical multiples of 4.0x to 6.0x to the $850,000 in adjusted EBITDA. That produces preliminary enterprise values of $3.4 million to $5.1 million. Enterprise value estimates the value of the operating business before deal-specific adjustments. At a hypothetical 5.0x, the midpoint example is $4.25 million. None of these multiples represents a current CPA firm market rate. You would need relevant transaction evidence and a comparison of client retention, staff depth, owner dependence, service mix, and payment terms to narrow the range.

From enterprise value to cash at closing

Equity value is the amount attributable to owners after adjusting enterprise value for debt, cash included in the sale, and any difference between delivered working capital and the agreed target. Working capital generally means short-term operating assets minus short-term operating liabilities; the purchase agreement specifies how it is measured. Equity value is not necessarily cash at closing.

For the $4.25 million midpoint example, assume $200,000 in debt to be paid at closing, $50,000 in cash included in the sale, and a $100,000 working-capital shortfall against the agreed target. Subtracting the debt and shortfall, then adding the transferred cash, puts equity value at $4 million, or $250,000 below enterprise value. If you keep the $50,000 instead, it would not be added to equity value, though you would retain it separately.

In this midpoint example, equity value is $4 million, but the amount wired to you at closing depends on the payment terms. Suppose the buyer holds $150,000 in escrow, an account that releases funds only when contract conditions are met. The buyer also issues a $200,000 seller note, a promise to pay you later, and gives you $300,000 in rollover equity, or an ownership stake in the buyer’s business.

Cash at closing would be $3.35 million, which is $650,000 less than equity value and $900,000 less than headline enterprise value. The escrow is included in the $4 million equity value, but its release is conditional. Neither the seller note nor the rollover equity is closing cash.

A CPA firm buyer might propose a holdback or escrow tied to client retention. Berkshire Business Sales & Acquisitions describes such clauses, but a retention condition is a negotiated term, not a requirement of every sale. An earnout is a payment contingent on agreed results after closing. If a proposed price includes an earnout, separate its conditional amount from the cash due at closing. If it sits on top of the stated purchase price, show it separately as potential additional proceeds.

Salt Creek’s EBITDA and valuation basics explains the general value bridge. For a CPA sale, you also need to check how the contract treats receivables and work in progress when setting working capital. Taxes and transaction fees can reduce your net proceeds further, but they depend on your deal and circumstances.

When you need a formal appraisal instead of a preliminary range

A preliminary sale range helps you weigh succession or a buyer’s offer, but a documented value may be necessary for litigation, a partner dispute, or a lender requirement. For a gift or estate tax filing, ask your tax adviser what type of valuation the filing requires. The purpose of the valuation affects the work and report needed. Mercer Capital’s guidance explains why an appraisal prepared for an estate matter must address the ownership interest being valued and support its conclusions.

When hiring a valuation professional, ask whether their credentials and report meet the requesting party’s requirements. Before commissioning work for a legal, tax, or lending purpose, confirm which credentials, standards, and type of report the requesting party accepts. Ask the valuation professional which standards govern the assignment. An informal sale-range conversation does not replace a formal valuation or calculation engagement.

Getting a preliminary read on what your firm is worth

An internal succession plan and an outside offer can place different demands on your finances, staff, and role after closing. A preliminary review of earnings, transferable client revenue, and payment terms can help you compare those tradeoffs before committing to either path.

Salt Creek Advisory’s principals, Jack and Connor Pitts, work directly with owners on sale planning and transactions. Standard M&A engagements have no upfront retainer; a preliminary conversation is not a formal appraisal. Request a confidential preliminary valuation conversation to discuss your firm and whether an internal transition or a sale deserves closer study.

Frequently asked questions

Can I sell my CPA firm for all cash at closing? Yes, if a buyer agrees to those terms and financing is available. Compare an all-cash offer with any higher offer that includes delayed or conditional payments. Berkshire Business Sales & Acquisitions describes agreements that tie some proceeds to client retention.

How does a private equity platform deal differ from a sale to a regional firm? A regional firm may focus on bringing your clients and staff into its existing practice. A private equity-backed platform may ask you to keep an ownership stake, called rollover equity, so part of your potential proceeds depends on the combined business after closing. Compare the proposed role, payment terms, and client transition plan, not only the headline price.

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