As with most professional practices, the thought of selling an accounting practice usually arises only when the workload becomes too much to bear, the owner is undergoing a divorce, partners have had a falling out, or some other financial opportunity arises.  While a large corporation is primarily concerned about its shareholders when selling the business, the small business owner is much more likely to consider the effects on the clientele, with whom personal relationships have developed over the years.  For example, a sole practitioner will wonder whether the clients will be accepting of and have confidence in the new owner(s)?  In addition, the sole practitioner will have to determine whether the goodwill engendered over the years will have continuing value?  These are factors that must be determined on a case by case basis, using the intuition of the current owner(s).  However, there are also tangible factors to consider such as past and projected earnings, the local economy, etc.  For these and other reasons, such as estimating the cost of capital, valuing a business is more of an art than a science and requires a certain degree of flexibility.
 
Companies can generate value for owners in either of two states: in liquidation or as going-concerns.  Liquidation value is the cash generated by terminating a business and selling its assets individually, while going-concern value is the present worth of the expected future cash flows generated by a business.  In most instances, practitioners are interested in selling the business as a going concern.  Whichever technique is used, the valuation comprises the following key elements:
 
? Gathering information about the company and the accounting industry – The selling memorandum, the basis for the buyer’s preliminary examination of the company, should contain comprehensive information about the firm, its history, operations and market position.
 
? Recasting the historical financial statements – The historical financial statements may need to be recast to make them more meaningful and to make them comparable with those of competitors.
 
? Preparing prospective financial statements – Prospective financial information should be prepared for the next three to five years, as this will be required by prospective buyers’ lending institutions.
 
? Comparing the company’s results with those of other companies in the accounting industry – Before proceeding to the valuation, the company’s restated results should be compared with the results of other companies in the accounting industry, and with the industry in general.
 
? Applying the appropriate valuation methodologies – Three approaches are commonly used in valuing a closely held business: 1) the balance sheet method, to derive the fair value of net assets; 2) the market comparability method, to compare the values of similar companies or recently sold similar businesses; and 3) the earnings method, to derive a value for the future earnings power of the firm.  Each method should be used to arrive at the ultimate “fair value” for the firm.  Further, a range of estimates should be prepared under differing scenarios based on varying assumptions.

Although you are an accountant and might feel comfortable performing the valuation yourself, it is not uncommon for accountants to hire outside consulting firms or brokers who are experienced in valuing accounting firms and who can therefore lend credibility to the value derived.  Should you choose to hire an outside consultant or broker to prepare the valuation, however, you are advised to do as much of the legwork as possible so that you will get a handle on the value of your firm.  This should protect you somewhat from a hired yet disinterested third party (i.e., consultant/broker) whose primary goal is to earn a fee from selling your business.  Should you wish to market and value the firm yourself, you may wish to take a course in valuing professional businesses, some of which are advertised on web, as provided in the list of sites below.  Lastly, it would be useful to view the sale from the buyer’s perspective and to peruse books and information that advise prospective buyers in buying accounting practices.  The Internet has a number of useful websites that provide information on this topic, some of which are listed below.  The most useful sites are listed first and each one is followed by a brief description of the information it provides.
 
 

Useful Web Sites
 
1. VALUING THE BUSINESS, Deloitte & Touche LLP
http://www.dtonline.com/selling/valuingbusiness.htm - A detailed informative web site that takes you each step of the way.
 
2. Professional Accounting Sales
http://www.cpasales.com/ - A good “jumping-off” point which will take you to many other useful links.
 
3. What Every Seller Should Know, Tom West
http://usatoday.bizsell.com/Journal/Current/shouldknow.html#CC – Much useful information on selling a business – a link from #2 above.
 
4. Valuing a Business or Professional Practice, by J. Nicholas Tollemache, MBA,
http://www.divorcehelp.com/RR/R13ValBus.html – This article provides advice for selling a business for divorce purposes.
 
5. Valuing Professional Practices - Buying and Selling Professional Service Businesses
http://www.gearup.com/buysell.htm – This is an on-line application for a self-help course in the subject topic.
 
6. Information on Selling Your Practice, Professional Accounting Sales of California
http://www.cpasales-ca.com/sellinfo.html – This is an advertisement for a nationwide accounting brokerage network.
 
7. The Complete How-To Guide For Buying An Accounting Practice
http://www.cpasales.com/bookord.htm – This is an advertisement for a guide to buying an accounting practice that should reveal what your buyer is looking for.
 
8.  ...When Selecting an Accounting Firm
http://www.access.digex.net/~evans/freebook.html – This is a guide for accounting clients; however, it may provide some useful tips for the seller/buyer of an accounting practice.

1998 by Anita H. Marchion

This document may not be reproduced in whole or part without the prior written permission of Anita H. Marchion.