How to sell an accounting practice in Canada

Small accounting practices in Canada are often priced on fees, and a 2018 sample of six BC sales ran from $0.375 to $1.00 per dollar of billings, with payment that can depend on which clients stay. Priced on earnings, the professional services row runs at 3.0 to 5.0 times adjusted earnings. Work out both before a buyer quotes one.

Two ways a practice is priced

Anyone setting out to sell an accounting practice in Canada will meet two kinds of arithmetic. The valuation InvestDeal runs places accounting firms in the business and professional services row, beside staffing agencies, at 3.0 to 5.0 times adjusted earnings, and the table of multiples by industry sets that row beside every other sector. Adjusted earnings are the profit with your own salary and personal costs added back, the figure explained in SDE or EBITDA. Commercial cleaning firms share that row, and selling a cleaning company shows how their building contracts move the price.

Smaller practices are also priced on their fees. Writing in Canadian Accountant in June 2018, Bridget Noonan, a CPA and partner at Clearline Consulting, reported six small firm sales in British Columbia at $0.375 to $1.00 per dollar of billings. She warned that a seller who assumes “all firms are worth $1.00 paid over three years based on retention” is likely to be disappointed.

Six deals from 2018 make a small sample, so read them as a guide to how the conversation runs. The fee basis suits a buyer who will fold your clients into an existing firm and serve them with its own staff. The earnings basis fits a practice whose staff and manager keep it running as a business after you leave. An insurance brokerage meets the same pair of prices, with its book of commission income in place of fees.

One practice, priced both ways

Take, as an illustration, a practice with $2.0 million of annual fees and $700,000 of adjusted earnings. The two methods give different answers for the same firm.

The gap between the rows is the reason to work out both numbers before a buyer opens with one. A buyer who quotes a dollar of fees for a practice with its own manager and a 35 percent margin is pricing it as a client list. Our engine then moves the earnings range for the usual factors: a practice a management team already runs earns up to 0.4 more, and one whose earnings have fallen for three years loses 0.3.

How a retention payment works

Where a price is tied to retention, part of it is paid later and moves with the fees that stay. Continue the illustration with a buyer who agrees to $1.00 per dollar of $2.0 million of billings, paid over three years. If clients billing $1.7 million are still with the buyer at the end, the seller receives $1.7 million, and the $300,000 of clients who left come off the price.

This is an earnout with client fees as the measure, and the wording of the agreement decides how fair it is. Three clauses deserve a careful read.

• The agreement should say whether retention is measured in fees billed or in clients kept, and fees protect a seller whose income comes from a few large clients.
• Clients the buyer reprices or turns away should count as retained, since their departure follows the buyer’s own decision.
• A share paid on closing day reduces how much of the price rests on events after you have handed over. Money held back for claims is a separate matter, set out in holdbacks, escrow and warranties.

Client consent and confidentiality

Client files are the asset being sold, and the professional code protects them. CPABC’s article on maintaining confidentiality explains that under Rule 208 a registrant discloses confidential information to a third party only with “proper and specific authority”, and it lists a client’s consent among the grounds that qualify.

That sets the order of a sale. A buyer first sees fees by service line and the share billed to your largest clients, with names removed. Client names and files come later, under a confidentiality agreement, and each client decides whether to move to the new firm. Selling a business confidentially describes how that staged disclosure runs.

The licence a buyer needs

Public accounting is regulated by each province, and the licence belongs to the person. In British Columbia, CPABC states that “individual practitioners are licensed, and firms are registered”, in its guide to public practice licensing and registration. Its practitioner licensing page lists four licence categories under Bylaw 703(1), each tied to the kinds of engagement a member may sign.

For a seller, the question is who signs after you. If your practice issues audit or review reports, the buyer needs a partner holding the matching licence on the day clients move, or that work leaves with you. Ask CPABC, or the body in your own province, which ownership structures a registered firm may use before you take an offer from a buyer outside the profession seriously. Dental practices face the same question, because each province decides who may hold the shares of a dental corporation.

Timing the sale around tax season

Personal tax work is crowded into the spring. The CRA lists April 30 as the deadline to file and pay for most individuals, and June 15 as the filing deadline for the self-employed, whose balances are still due on April 30.

A buyer serving your clients for the first time will want the handover to land after June, with a full year to learn the files. The retention period should also run through at least one complete filing season, since spring is when a client decides whether to come back. Fix both dates in the letter of intent, where they are easiest to negotiate.

Your relationships carry the price

Clients hire an accountant they trust, and at a small practice that person is usually you. The share of fees that stays depends on how you hand those relationships over, which makes the transition part of the price. Expect a buyer to ask you to stay through at least one season and to introduce the new partner at each client meeting.

Work your staff already do with clients is work a buyer can count on keeping. Selling a business that depends on you covers how to hand that work over in the year before, and an accountant advising a client through a sale will find the other side of the table in what accountants should know when clients sell.

1. 01Split fees by service line and by client for the last three years, so a buyer can see what recurs.
2. 02Move the larger clients onto engagement letters that renew each year.
3. 03Introduce a senior staff member to each of your twenty largest clients, and let them lead part of this season’s files.
4. 04Note which engagements need a licence your buyer must hold, and who signs them today.
5. 05Work out both prices, on fees and on earnings, before anyone quotes you one.

Selling the shares of a professional corporation and selling the client list as an asset are taxed differently, as share sale or asset sale sets out. To see where your practice sits on earnings today, the Quick AI valuation gives an early range in a few minutes, before you give anyone your name.

The buyers, due diligence priorities and sector requirements are set out on InvestDeal’s professional services M&A advisory page.

Questions owners ask

What is an accounting practice worth in Canada?

Two measures are in use. On earnings, the professional services row of the InvestDeal valuation runs at 3.0 to 5.0 times adjusted earnings. On fees, a 2018 Canadian Accountant column reported six BC sales at $0.375 to $1.00 per dollar of billings. A practice with its own staff and manager has the stronger case for the earnings basis.

How does a retention based payment work?

Part of the price is paid over a period after closing and moves with the fees that stay. As an illustration, at $1.00 per dollar of $2.0 million of billings, clients billing $1.7 million at the end of the period would give a price of $1.7 million. The agreement should define how retention is measured.

Can I share client files with a buyer?

Client information stays confidential under the professional code. CPABC explains that Rule 208 allows disclosure to a third party with proper and specific authority, a client’s consent among them. A buyer should first see totals with names removed, and files move once each client agrees to the new firm.

When is the best time of year to sell an accounting practice?

A handover after the June 15 filing deadline for the self-employed gives the buyer a full year to learn the files before the next season. Any retention measure should run through at least one complete filing season, since spring is when clients decide whether to come back.