How to get to adjusted cash flow

As briefly mentioned in our previous post about valuation, adjusted free cash flow can have a direct impact on what a buyer is willing to pay for your firm. As an accountant you are likely well aware of the standard practice of adding back officer compensation.  When it comes to small to medium size independent CPA firms this add back is often the primary adjustment made and provides a significant boost to the firm’s normal free cash number. 

 In addition to officer compensation a firm should, without hesitation, add back any one time or non-recurring items.  Typically we see some rendition of the following added back in the transactions we do:

  • Auto expenses
  • Health insurance premiums
  • Legal expenses
  • Cell phone expenses

 In addition to these standard items there are a number of adjustments that can potentially be made depending on the buyer.  If the buyer is an individual or small firm buying a practice then the previously mentioned adjustments are all that they are likely to accept.  If, however, the buyer is an experienced acquiror with an existing practice then there are a number of additional add-backs you can consider to create value. These expenses include:

  • Software expenses
  • Expenses related to duplicate staffing
  • Rent and utility expenses
  • Marketing and advertising expenses

Given that these expenses are considerable in size for an independent firm, it is easy to see why selling to a buyer that is experienced in integrating mergers, such as Platform Tax & Consulting, is a tremendous benefit to you as a seller.