Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How a Small CPA Firm Sold at 19x EBITDA with Tax Season Recurrence
Transcript
- Lucas: So there's this assumption I hear all the time from owners of professional service firms — that if your business is built on billing by the hour, you have zero recurring revenue, and therefore your exit multiple is going to be stuck around four or five times EBITDA. Luna: Right, and you're about to tell us that assumption is wrong. Lucas: Completely wrong, if you pick the right niche. Let me give you a real deal that closed in February this year. A three-partner CPA firm in suburban Denver — about 3,200 individual tax-return clients, a handful of small business compilations, almost no audit work. They sold for 19 times EBITDA. Luna: Nineteen times? That's more than you see for a lot of SaaS companies. What was the revenue mix? Lucas: Roughly 82 percent of their top line came from individual tax return preparation — 1040s, state returns, the occasional amended filing. The average fee per return was about 475 dollars. The other 18 percent was bookkeeping clean-up and a little bit of payroll processing for local restaurants and dental practices. Luna: So the product is basically commodity tax prep. Why would a buyer pay a premium for that? Lucas: Because the recurrence is brutal — in a good way. This firm had a client retention rate of 94 percent year over year for the past seven years. Think about what that means. Tax season hits, the same 3,000-plus households show up every spring, they bring their W-2s and 1099s, they pay their invoice, and they leave. The buyer doesn't have to market, doesn't have to upsell. The volume is predictable within a very tight band. Luna: But the risk — if the IRS ever introduces return-free filing or pre-populated returns, doesn't that whole model evaporate? Lucas: It's the question every buyer asked in diligence. The firm's response was twofold. First, 60 percent of their clients had some form of self-employment income — Schedule C, rental properties, side gigs. Those returns are messy enough that a pre-populated form won't cut it. Second, they had a ten-year history of the IRS talking about simplification and never doing it. The buyer accepted that the regulatory risk was real but distant. Luna: Okay, so the recurrence is there. But how do you get to 19 times? That implies a very specific buyer thesis. Lucas: The buyer was a regional roll-up platform that already owned eight CPA firms in the Mountain West. They call themselves a 'tax preparation aggregator'. Their play is simple: acquire firms with large individual tax bases, consolidate the back office, move all clients to a standardized software stack, and cut the cost to serve by about 40 percent. For them, this Denver firm wasn't a standalone business — it was a client list that plugs into their existing infrastructure. Luna: So they paid a premium because the marginal cost of adding 3,200 clients to their system is basically zero. Lucas: Exactly. The firm's EBITDA was about 1.1 million dollars. Standalone, maybe it's worth seven or eight times — call it eight million. The platform paid 21 million. But their internal model showed they could keep 95 percent of the revenue while cutting overhead by 400 thousand a year. On their cost structure, the effective purchase multiple drops to about 12 times. Still high, but doable. Luna: That makes sense. So the seller didn't just sell a business — they sold a slot in a consolidator's map. Lucas: Right. And the deal structure reflected that. The partners got 60 percent cash at close, 25 percent in seller notes over three years at 6 percent interest, and 15 percent in an earn-out tied to client retention over two tax seasons. If they keep retention above 90 percent, the earn-out pays an additional 1.8 million. Luna: So the sellers are highly motivated to make sure the handoff is smooth. They don't just cash out and disappear. Lucas: Correct. Two of the three partners stayed on as salaried managers for at least 18 months. One retired. The platform wanted continuity because the client relationship is often personal — your tax preparer knows your kids' names, knows you bought a house, knows your mother passed away. If a new face shows up next April, people leave. Luna: That raises a question: if the recurrence is so sticky, why didn't the partners just grow the firm themselves and capture the full value? Lucas: Because they hit a ceiling. The three partners were also the lead preparers. They each handled about a thousand returns personally. To grow beyond that, they'd need to hire more CPAs, but the local labor market for tax professionals is brutal. The going rate for a senior tax associate in Denver is about 95 thousand plus bonus. The margins on a 475-dollar return can't support that. The platform solves that by centralizing preparation in a lower-cost city — they have a team in Boise doing the data entry. Luna: So the partners sold because their own labor was the bottleneck. That's a classic professional services trap. Lucas: It is. And it's why I think this deal is instructive for a lot of service business owners. The thing that made the firm valuable wasn't the partners' expertise — it was the recurring habit of the client base. The buyer essentially said: we don't need the partners' brains, we need their address book and their annual appointment calendar. Luna: That's a hard thing for a founder to hear. But it's probably true for a lot of businesses where the owner is the product. Lucas: Let me give you a quick checklist for listeners who think they might have a similar hidden asset. First, calculate your client retention rate over the last five years. If it's above 90 percent, you have something. Second, identify what percentage of your revenue comes from clients who return on a fixed annual cycle — tax season, back to school, holiday, whatever. Third, ask yourself: could someone else perform the core service with a two-week training ramp? If the answer is yes, you have a scalable asset. Luna: And if the answer is no, you're probably selling a job, not a business. Which is fine — but the multiple will be lower. Lucas: Exactly. The Denver CPA partners were honest about the fact that 80 percent of their returns were straightforward — W-2 with a mortgage interest deduction. They didn't pretend it was high-end tax planning. They positioned it as a high-volume recurring service business, and they found the exact buyer who valued that. Luna: I think that's the real takeaway. Know what you're actually selling, not what you wish you were selling. Lucas: And if you can get your retention data into a clean spreadsheet, you might be surprised who shows up with an offer. Luna: If this episode moved your thinking forward even a little, the way these stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. No pressure, just if it's useful. Lucas: Appreciate that. So the last thing I'll say — for anyone in a service business right now — start tracking the recurrence metric this year. Not revenue, not profit. Just: what fraction of last year's clients came back. That number is worth more than your P&L. Luna: And if you're at 94 percent like that Denver firm, you might want to get a broker on speed dial.