Due Diligence

Q: How do I go about determining the value/selling price of a service business? I am a CPA who is interested in selling my practice and purchasing a practice in another state but I am confused about how to determine the price at which to sell and to buy.

A: Great question. The good thing about service businesses and especially professional practices is that they are not complicated transactions. The bad news is that they do rank at the top of potentially risky acquisitions. Depending on the practice itself, if the owner is perceived as “the business” the possibility exists that as the owner goes out the door, so too can go the clients.

Generally speaking, the valuations should be around one time the annual Owner Benefit figure (Pre-tax Profit + Owner Salary + Owner Perks + Interest + Depreciation). Plus, you should also have an earnout formula based upon retention of certain key clients for a period of about 12 months. You need to be sure that the business you take over will be the same or better in a year as long as you are as effective in running it as the current owner.


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