mintz-
I do forensics and valuations. That article link was pretty spot on. If you are asking about a specific valuation, you should consult someone that has experience in the local market.
As a general rule of thumb, there are three ways to measure a business:
1) Market Approach- generally the most relevant valuation method for a professional services firm
2) Income Approach- would be used if no comparable transactions are identified
3) Asset-based Approach- typically not relevant to a CPA firm unless under a few specialized circumstances
For a sale/purchase transaction, the most relevant approach would be the market approach. The valuation analyst would research comparable transactions and base the estimated value on a multiple. For a CPA firm that multiple would most likely be either profit or billings.
So, for example the three most comparable firms sold for 2, 2.5, and 3x earnings. The base multiple used in the calculation may be 2.5x earnings before adjustments to the multiple. In all reality, it could be anywhere between 2 & 3. The base multiple used is the valuation analyst's opinion. At this point, there may be a few tweaks here and there to adjust for workforce competency, financial strength, great clients, synergies, etc.
Next, excess working capital or non-operating assets are then added to the value and any working capital deficiency or non operating liabilities are then subtracted from the value.
A multiple of profit or billings are generally the most widely used due to their understandability and ease of use. For more complex transactions, a full SSVS No. 1-compliant valuation should be employed as well as consideration for particular circumstances surrounding the transaction.
Please be advised that I am speaking in very general terms and that I offer no valuation advice except to consult a local valuation professional, preferably one that has an ASA, ABV, or CFA.
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