507 6 Ways To Increase the Value Of Your Accounting Firm

Let's be real. In 2025, most accounting firms on the market are worth nothing. In fact, the only reason that many of them sell is there's a relationship there. Somebody in the firm agrees to buy it, they have a friend that runs a similar firm who will take it over. But most firms, the juice is not worth the squeeze. But the other end of the spectrum is pretty juicy. The EBITDA multiple numbers that you hear are like overinflated. But that doesn't mean that it isn't worth thinking about. How can I make my firm more transferable? Because the same things that actually make it more valuable to a potential buyer down the road make it more resilient in the near term. So I'm going to run you through the six biggest drivers of the value of your accounting firm, whether you want to sell it or not. But then as you think through this, you'll actually find like, oh, even for myself, who's not a person who's real big on the notion of like building to an exit, there's actually a path here that I think everybody can get excited about that could lead to you getting paid for that thing that you built. If you're new here, welcome to Jason On Firms the podcast, we talk about all things run on accounting firms. My background, I last ran a 40 person firm. Now I spend all my time on this Internet grift. But I myself, I was never into the idea of building an accounting firm to an exit when I like, I'm not gonna walk around in my firm with a shirt on that says my goal is to ultimately sell out. Because who does that hurt in the end? Well, it hurts all the people that bought into, like working with me and coming to my firm. It burns all the clients that came and worked with our firm. Have you been in the game long? You know what happens after a sale and I don't. I mean, I can maybe count on two fingers the number of times where I actually thought it was better for the people involved, for the employees, for the clients, after sale as opposed to before sale. And that for me, the notion that I get a payout, that I get to cash in, it just kind of sucks to me. Like, let's be real, like, if you're an accounting firm owner, if you've been running a firm for three years or more, there is honestly, like, unless you are intentionally taking things slow, it is very rare that someone won't be clearing a quarter million a year. The owner, that is. And we talk about many people on this podcast who will Take home a million dollars or more a year running small 50 plus percent margin firms. If the version of you that was, you know, 23 years old and working for somebody else and making 60 grand a year, if that version could see the version of you that's clearing 700 a year and says, but what I really want to do is get this exit at a 2.2 multiple and, and get this pile of cash. Meanwhile your team's making 60 to you know, 160 a year, that 23 year old version of you, they would beat you up and steal your lunch money. And this is why I had a hard time like getting behind the notion of like sell, like building to this big exit. And it's the same thing. I think tech Silicon Valley has glorified this, the notion of like, well, you just, you build to hyperscale and then you leave. But how many software tools have, have you loved that were then sold to someone else that then went to crap? It's the same thing there. The goal of like creating your baby, this, this amazing thing, your life's work and then dumping it on someone else and everyone associated with it, like having a bad time, that sucks. I would actually say in the software world there's a better mechanism for this because the early folks in there have options. And so a win for you is going to be a win also for the most important people on your team in an accounting firm. Exit. Ah, that's not usually the case, right? You're cashing out, you're like, hey, appreciate your loyalty. Over the, over the years I'm out of here. Or you know, I've got a two year earn out where I'm going to mail it in at this firm before going on and doing something else. That's what I would have told you probably 24 months ago. I'm coming around to something different and it's something that I've seen happen in the wild now as I meet more folks that run firms, but also as I see more people becoming better connected in the accounting industry with other firm owners. I was at an event a few months ago talking with a guy and he's like, yeah, I bought this tax firm and I don't know why I said it. I was like, who? Like as if I've got a mental Rolodex of every tax firm out there, right? He said who it was. I knew them very well. I had actually talked with them when they were considering selling their tax firm. I think I talked them into it a little bit. Like if I was smarter, I'd have been like, I mean, I should probably get a piece of this guys. But what I'm seeing more and more in the wild just happening organically is you have folks that know each other very well. They run the same practice management system. They're very aligned on the right way. They see of running an accounting firm, the notion of that firm selling to the other or merging with the other, that's kind of great. That is a match made in heaven. That is not a match made in a broker's finders fee. That is not a match made in a PE roll ups EBITDA multiple. That is two very aligned firms coming together. And that's actually kind of cool. And the more connected you are with other folks that think the way you do on this stuff, the more optionality you'll have. We've talked about Rebecca Driscoll, who does some content online, is running the community with Mike Silvester. She sold her bookkeeping practice, got like well over a hundred inquiries from a couple posts because she is so well connected. We, in my business, we often kick around the idea of like, should we launch a firm just to document the journey. Because I think that would be an amazing thing for people to be able to see. Right. The reality is if we did that, we would probably have a sale lined up beforehand. Because I'm not going to run a firm. Like the purposes of launching and running a firm would be to document it. And so we probably have a plan going into it in 24, 36 months. Probably going to sell. I could probably line that up ahead of time. Right. Because there would be a market for people to buy a firm that I built and that may seem unique to me, but it really isn't. If you know someone who believes in you and your ability to run a firm, you're going to get a better multiple from that person than you could get from anyone else. And there's a much greater likelihood that your team and your clients will then have a good experience. It is the type of PE I can get behind. Personal. What would the E stand for? Exits. Personal exits. There's gang. Let's come up with a better acronym for friends, like selling to friends. Oh, peer. Peer exits. Yeah, that's pretty good. Let's call it peer exits. So the first of the six ways to make your accounting firm more valuable. Have a network. Man. There's a lot of multiples that get thrown around and misconstrued. I can tell you I've been privy to honestly as many deals as probably Anyone in North America the last few years. Most of the numbers you hear, they're not real. They're numbers that get offered. But somebody sending you an email, that's not the number you're getting offered. And oftentimes the numbers that are like getting closer to two that comes with a huge amount of restrictions and clawbacks where like your going to work for that company in perpetuity. If any of your people leave, that number gets smaller. The bigger the number is, the more strings that are attached. But a lot of folks will, will throw around numbers of like 4 to 6x or, or really anything above 1.5. Virtually nobody is getting unless the buyer is flush with cash and doesn't know any better. 80% of deals come in between 1.2 and 0.8. And most of the folks you hear from that are, that will tell you otherwise. They're involved in the deals, they're brokers trying to put stuff together. They are you know, folks doing roll ups in the tens or hundreds of millions, which is a different world. That's not what we're talking about here. But the sole exclusions I have seen to that is pe, that is, that is peer exchanges. Even exchange doesn't make a lot of sense. I've really confused this whole thing. It is relationship selling where somebody has a genuine opportunity by pulling in your clients that a normal person, someone without all that context wouldn't have. They can do more with your clients because they run a similar firm because there's less risk in the team leaving and the clients leaving because you're so well aligned. And so I have seen north of 2x multiples between people with a really, really good relationship. And the less somebody knows you, the less you're going to get paid for that firm. So my number one tip to you, build a network. It is the best way to run a firm not just from a financial standpoint of getting to a better outcome, but from the standpoint of getting to an outcome you can sleep with. No, not sleep with. You can, you won't lose sleepover. I thought that, I thought something sounded wrong there. Okay, second driver of your firm's value, getting yourself out of the work. And this is a tough one for the folks that are wired to be technicians and we enjoy doing all this stuff. But the reality is the more involved you are in the work, the more that's going to hit what you're going to get paid for the firm and somebody's willingness to take it on because if you're stepping out, even if that's over, you know, a few year phase out, somebody still has to do all of that work. As opposed to if I had sold my 40 person firm where I was completely out of the client work, I had a, I had a partner who was in the client work, but let's say that partner wasn't there. The value of that 40 person firm with me doing the work versus me doing none of the client work, those are two very different things. It means I've got a management structure that can support that stuff without me being hands on with the clients. That's a much more attractive business than the one where I am just working my little buns off trying to keep the clients happy. Not only because you have to pay somebody to come in and do that work, but because all of those clients that were reliant upon the owner, you're going to lose a lot of them. There's a lot more risk in that deal as well. Okay. Third big driver of value. It is recurring revenue. Right or wrong, people like the recurring revenue. This can be tough to build in a tax practice. And it's one of the reasons why a lot of tax practices are moving towards being cast practices that only do tax work for their cast clients, clients. Not to say that you can't build a very profitable tax practice doing once a year work, but the whole flywheel of your recurring revenue showing up in the bank every single month, using that to fuel like growth and doing more things, it's very attractive. Now, a bit of a curveball here. Something I think people don't consider with firms that don't have any recurring revenue is if you just consider my firm from before I bought into it to where it was at by the time I left. When I bought into it, it was a traditional firm doing hourly billing, billing after the fact. And so you add clients that wouldn't get billed until August, September, October, November, even December for the tax work that happened in the summer during tax season and all that. Right. Like we've all seen what that looks like before. We're actually doing like six months of work before we ever get paid a dime for that. Now one of the things I really pushed in the firm was pulling the cash cycle forward, pulling a lot of the work forward to doing year end tax planning to do mid year tax planning. And anybody that we pulled in to do year end tax planning or mid year planning, we would get them set up on at the very least like a three installment sort of thing where we're getting paid during the tax year with one final payment when the tax return is completed. And if you compare the previous approach to where you're not even billing folks until October or November to that same client doing mid year tax planning and getting paid in like July, December and May, you're pulling a big chunk of that cash forward 12 months. And if you are stepping into a firm like that, that is a traditional firm where everybody is billed after the fact and you're able to successfully pull that cash cycle forward, that cash is pure profit. Now you still have to do the work down the road, but the one year that that adjustment happens, you're genuinely pulling cash forward in this kind of a one time thing. Because the company you bought was billing clients just like chronically in arrears right now. What does this look like in practice? Well, if you're gonna do a transaction on January 1, the previous owner's getting paid for all the work that happened up to 1231. But as part of the transition, I'm doing all of the tax work for the client in this new year and that is the tax work that applies to the previous calendar year. I'm probably gonna bill them more or less how the previous accountant build them, but next time we're gonna push planning and we're gonna have like two years of billings or at least part of the next year of billings getting pulled into that first year. That won't be the case in future years, but it means in year one we get this like wind foot windfall of cash from pulling that stuff forward into the first year. It doesn't necessarily mean that makes an old legacy business worth buying. But this was very real in my firm. Like that money came forward and it was nice. And if you're looking at an arbitrage opportunity where you're say buying a tax firm but then rolling out caswork for the first time, that can be real nice. I mean, you buy a tax firm at 1x and then you get 20% of the client base to upsell into cash services where the Fees are now 5x what they were before because you're doing monthly bookkeeping or something like that. That is a very cheap way to buy a business that could be worth a whole lot more money. Today's episode is sponsored in part by Stanford Tax. Do you have a plan for next tax season yet, buddy? It is high time to be using the tech now that you're going to be using next tax season. You don't wanna ride into battle in January and February on stuff that you're not already comfortable with. And if you're just feeling like overwhelmed at not knowing what tax intake solution to use, buddy, look no further than Stanford Tax. One of the earliest ones in the game, one of still the most widely loved tax workflow solutions. And they're doing some cool new stuff. Stanford Tax. Now it's not just a way to like push a port to your client for them to submit information though you could certainly do that. Growing number of firms are just using it internally because you compile whatever source docs you got in there and it will automatically like check off the items from the pro forma checklist to like see like do I have all my info in now or not? Like it does that automatically based on what it sees on the docs. It builds out this like nice indexed sort of workpaper file, auto renames all the files, organizes them like almost like a, like a PDF, like a bookmark PDF but in the cloud. And you can now even like do annotations in that. So you literally just take your big old pile of source docs from the client, chuck it in the Stanford Tax, it does all the organizing and then you've got a dynamic checklist that will tell you do I still need more information from them or not. A massive upgrade to traditional methods for gathering 1040 info, which is just kind of a mess. I can put Stanford in front of my clients and they can submit the docs, or I can just use it internally. And any old way that docs come in they just get piled into a single centralized place. Very, very good platform. Check out Stanford Tax. More info down in the show notes. This episode is brought to you in part by Client Hub, the practice management system. If you are considering a new practice management system, there's no way that you're not overwhelmed. Let me give you the TLDR on who are the people that need to be exploring Client Hub specifically. Client up started out as a really good sort of two sided task management system for bookkeeping firms. So you've got your own tasks to manage. But we also push tasks to clients when they're holding us up and we need information from them to get that stuff done right. Cloud Hub is one of the kind of the client portal first PMs that makes that as as smooth as possible for your clients. But increasingly they're getting into all things workflow, specifically your bookkeeping workflows. And so if there's one thing it does really well, it is for folks that don't want to have a standalone like month end close automation platform. But then a totally Separate piece over here. Client Hub might be the best marriage of those two things in a single place. So if you want more like power user month end close automation stuff, but a version of that that is like inside of your practice management system, worth giving Client Hub a look, check out the link down in the show notes. Okay, we got three more to go. First, way to make your firm more valuable. It is relationship selling, building your network. Second, getting yourself out of the work. Third, more recurring revenue. Number four, people don't think about this one. Much less reliance on accounting expertise. What are the things that you are selling that are not blocked by having to hire one more accountant? This is why like wealth management usually trades at a better multiple. It's why cast practices and like the peripheral work and the support work that you can do for a small business that trades at better multiples than tax work does. In my cast practice we were probably 50% or less actual accounting professionals. The folks doing the bill pay the reporting. Like there was so many aspects of that business that were not run by accountants because the accountants were the hardest people to hire. And when you're selling something like that, that is much more scalable because it's not reliant upon finding the next unicorn. That's a bigger opportunity than selling more tax work. Number five, modernizing the tech stack. When I talked about firms that are worth nothing, I would say, for example, paper firms, firms that complete their work on paper. I would say there is no market for them besides relationship selling. They have a friend that also runs a paper firm and they'll buy them. Or they have someone coming up through the firm, bless their hearts, who haven't realized all the other options they have and will then buy the firm. Now, if you have changed, like migrated a firm from one practice management system to another, you know just how brutal and how much work that is. So if you're looking at buying a firm that runs on, you know, say practice CS and you're running on a more modern cloud practice management system, that is a very real consideration and how attractive that firm is as opposed to that other firm running the same practice management system as you, you better believe this makes a difference in the eyes of the buyer. It is infinitely easier to roll that firm in when you are running on the same systems. It's not to say there aren't a hundred nuances to like, how is this firm using the system versus that firm using the system, but it is infinitely easier than oh my gosh, picking up a paper firm, teaching them to do like digital Work papers and use a cloud practice management system and good freaking luck, man. I made a dig there at the folks in those firms who are going to then buy those firms. If you're one of those folks that. That probably jumped out. If you are coming up through a firm that is a paper firm, it does not mean that there is not a path forward to where you coming into ownership in that firm and transitioning the firm. It's not to say that that is not worthwhile. What you have to do, though, is you have to be real about the fact that there are hundreds of very progressive firms listening to this podcast right now who would happily welcome you into their firms with open arms. You gotta have a clear answer for why is this paper firm better for me to step into ownership of than something more progressive? Where people aren't going to fight me every step of the way, where it's not going to be a legacy client base. And usually the answer there is, well, I'm very loyal. It's the firm that I've worked for over the years. The partner has said, we're going to do xyz. You just got to be really, really careful. Oftentimes those goal posts, they continue to move, even in generational firms. I will tell this to people sometimes where they're like, yeah, it's Dad's firm. He's good for it, man. Those can be the most sticky ones sometimes. Rule of thumb, if you perceive there to be an agreement, if that person won't put that agreement in writing, then it's not an agreement. And if they're keeping you in that limbo of, oh, you gotta, you gotta earn this agreement that we've talked about, then, man, that is putting a lot of trust in someone else who has total control over your destiny and you really have no leverage. And oftentimes, in fact, I met someone at an event this year who was literally in tears and frustration over the situation. And I can so relate to where they were. It was not until. It's very often it's not until you say, you got to realize, I have other options. I don't need to do this. It's not until that conversation gets real that the person sits up and they're like, okay, fine, I will actually talk turkey. Because the reality is, you step out of the picture. A lot of these folks in these legacy firms, they think there is a market for their firm that just does not exist. You are the market for their firm oftentimes. And sometimes you got to call their bluff for them to realize you have that leverage because in the market at large, a volume tax firm that is doing work on paper, there is not a market for it outside of someone who is in that firm or knows that firm personally, who'd be willing to buy it. The same progressive firms that are listening to this podcast, they sell their firms too. Why would you not go after one of those instead of the old crotchety one? That's going to be like pulling teeth to make any change and bring those clients around, right? So number five, modernize the tech stack. And I just love that there are more organic connections being made there where they're like, I use this system, they also use that system. That's going to make it way easier to come together. And last number six, having a scalable staffing plan, that's, that's the biggest risk of stepping into a new firm is actually, I would say the staff leaving. There's risk of clients leaving for sure, but if the staff leaves, you're hosed. A bunch of clients leaving, you keep the staff, you could probably still keep that staff plenty busy with other clients, but the staff leave, you're in bigger trouble. And you know, you look at two different firms, you can have a firm that solely does local hiring and everybody has to come and work in an office. And you can see how inherently constrained that is where we can only hire from local people. And it's going to be very hard for this group to work with a remote team because inevitably if you have both in office and remote, they operate like two separate teams. And it's not to say that there aren't upsides to this. If I could work with one team running an accounting firm, it would be an in office team. Like, I love working in office with people, but it comes with a bunch of trade offs. Right? If you compare that to another firm where they have an onshore team that is distributed across the United States, where they have just as many people offshore that is distributed around the world getting the work done. When that firm goes to make their next hire, they've got options. When the local only firm goes to make their next hire, it's different, right? And so how scalable that staffing model is, what would it look like for the firm to continue to grow? That makes a really big difference. And it's yet another thing where the alignment with the purchasing firm becomes important. Very hard for like an in office traditional firm to acquire a firm that is totally distributed or vice versa. Now the trap here, the one thing I will never recommend you do is build a firm Optimized for sale at your own expense. And this, I've seen this happen before where folks, they follow the kind of thought leadership Kool Aid of like, here's I just got to do X, Y, Z and then this will happen and they run themselves into the ground and they do make all these trade offs that they wouldn't otherwise make. And then so often that thing doesn't happen, it's not what they thought it was, and they've now like just totally fried themselves chasing that thing. In fact, man, when we worked with dentists, this was such a problem in dental clinics where the only asset they would have in the, in their entire life was the dental clinic. And they would build their entire retirement plan around the notion of somebody buying this clinic. And that is putting like all of your eggs into a very risky basket as opposed to designing the firm that's going to work best for you and your longevity. Because if I'm running a small firm at a 40% margin and I can work another two or three years because I've, I've found a way to sort of slow things down, pair my role back to the stuff that I enjoy. And so the notion of working another two or three years, that is, that's going to work fine for me. That probably means hiring some higher level people. So maybe it takes a bite out of my margin a bit, but being able to put in that another two or three years and enjoy the entire journey as a result, that's going to put as much money in your pocket as this like all out gung ho thing, building a firm for somebody else that may or may not ever sell. So I would caution you, don't play anybody else's game. Like, this is still your business. Don't run yourself into the ground over the possibility of building something someone else may want. Like, you got to put yourself first in your sustainability ahead of anything else. But also these days, as the world is getting smaller, you have folks, I mean like deals literally coming together in the comments of YouTube videos. As the world is getting smaller, there's a different version of M and A that I actually think is kind of interesting. And if you sprinkle in a little bit of like millennials and zoomers not being able to do anything more than five years, that flexibility honestly is appealing. The first partnership agreement that was ever put in front of me said, if you sell the Firm before you're 67 years of age, you walk away from it and you get nothing for it. That is sell to the partners. That was the Way, the partnership agreement had been written forever. I'm like, bro, I'm a millennial. You should be tickled if you have me here in 36 months. That's a big blocker to people specializing even. And niching down, they're like, I don't know if I'm going to be into working with phlebotomists three or four years from now, man. If you're not, would it be great if you had somebody else in your network who was. You got an exit plan. It's the same as having somewhere for your clients to go that, you know, no longer want to work with. That referral network of being like, these are my C and D clients, but I can see how they'd be great for this other firm. Not because they're bad people, just because they're not a great fit for you anymore and they're an awesome fit for someone else. It is infinitely easier to hand those clients off when you got that firm in your network. In the same way that the day you're like, I think I'm ready to move on from this firm. And you raise your hand if you're a well connected person, even people who don't outwardly say they buy firms, they'll be interested. And I'm seeing that happen more and more. For the folks who are taking the time to kind of connect with other folks in the industry, build that network. And honestly, it's the best because, like, going to accounting conferences these days, like, it is like a family reunion. You see a lot of the same people. It's just so many cool, genuine folks. A lot of folks you spend a lot of time with online and then you see them in person for the first time. And that's just magic. I love that for our profession, the people are making friends with other people who do what we do. And that's actually grease and the skids of all things business too, right? Particularly if you put it up against, like, the toxicity of the traditional, you know, regional firms getting bought out by big firms and pe and like, maybe there's a version of PE that works someday, but right now sure feels like it kind of sucks. The more humble version of that, peer to peer, like, that's super cool to me. Anything you think I missed? Other drivers of the value of an accounting firm. Stuff you should consider in the way that you build your firm. Drop that stuff down in the comments. Thanks for being here today and I'll catch you in the next one.