Why CPAs Are Key to Business Valuations

Brandon Chicotsky
1 hour ago
9 min read

Business valuations are essential for mergers, acquisitions, sales, and financial planning. However, brokers often face challenges like inaccurate financial records, unrealistic projections, and overestimated business values. This is where CPAs come in.

CPAs analyze financial statements, adjust figures for accuracy, and apply proven valuation methods - income, market, and asset-based approaches. These methods ensure precise valuations that buyers, sellers, courts, and lenders trust. CPAs also help minimize tax liabilities and improve negotiation outcomes.

Key Takeaways:

CPAs provide unbiased, accurate valuations by reviewing financial data.
They use three main valuation methods: income, market, and asset-based.
CPA-led valuations are detailed, defensible, and widely accepted by banks and regulators.
Working with CPAs can prevent costly mistakes and improve transaction outcomes.

For businesses with earnings under $25 million, involving a CPA early can streamline the valuation and sale process, ensuring fair pricing and better financial results.

How CPAs Fix Valuation Problems

Financial Analysis by CPAs

When tackling valuation challenges, CPAs rely on in-depth financial analysis. They dig into financial statements, cash flow records, tax filings, and historical data to paint a clear picture of a business's financial standing. This meticulous process often reveals issues that brokers might overlook - such as overstated assets, hidden liabilities, or one-time expenses that skew profitability metrics.

The real value lies in adjusting financial figures to reflect consistent, recurring performance. For instance, if a business reports an EBITDA of $1 million but includes a one-time $250,000 asset sale, a CPA would adjust it to a normalized EBITDA of $750,000. This adjustment ensures buyers don’t overpay and sellers don’t rely on inflated numbers when making decisions.

CPAs also provide unbiased, independent evaluations. Unlike brokers, who may prioritize closing deals quickly, CPAs adhere to strict ethical guidelines. Their impartial analysis highlights risks and eliminates biases, producing valuations trusted by courts, banks, the IRS, and investors alike.

Once they establish accurate financial data, CPAs move on to selecting the best valuation method for the business.

3 Standard Valuation Methods

CPAs use three primary valuation methods, choosing the one that aligns with the business type and the purpose of the transaction.

Income Approach: This method projects future cash flows and discounts them to their present value. It’s ideal for businesses with steady, predictable revenue - like consulting firms or service providers. For example, if a CPA projects $500,000 in annual cash flows for a consulting company and applies a 10% discount rate, the resulting valuation is $5 million. CPAs ensure these projections are grounded in a thorough analysis of earnings sustainability.
Market Approach: This approach compares the business to similar companies that have recently been sold, using metrics like EBITDA multiples. For instance, if similar businesses in the industry are selling for 4x EBITDA, a CPA uses that as a benchmark. This method works well for industries like retail or manufacturing, where comparable sales data is available. CPAs ensure adjustments are made for differences in scale, operations, or market conditions, providing a fair and credible valuation.
Asset-Based Approach: This method calculates the net asset value by summing up all tangible and intangible assets, then subtracting liabilities. It’s particularly suited for asset-heavy businesses, such as real estate or manufacturing companies. For example, if a company owns $2 million in equipment but carries $800,000 in debt, the net asset value would be $1.2 million. CPAs ensure that all assets are accurately appraised, avoiding the undervaluation of physical holdings that brokers might miss.

3 Valuation Methods CPAs Use

When it comes to valuing businesses, CPAs typically rely on three core approaches. Each method provides a different perspective on a company's worth, and seasoned CPAs often combine these approaches to fine-tune their evaluations and ensure accuracy. Here's a closer look at how these methods work and when they're most effective.

The income approach is particularly useful for businesses where earnings - not physical assets - are the primary drivers of value. With this method, CPAs project normalized cash flows over a period of three to ten years, using historical performance and industry trends as a guide. Normalizing financials involves adjusting for one-time events and owner-specific expenses to get a clearer picture of true earnings potential. Then, they apply a discount rate that reflects factors like the business's risk, size, and market conditions. For example, a CPA evaluating a profitable digital marketing agency with minimal physical assets but strong recurring revenue might project future cash flows and discount them at a rate of 20–25% to account for risks like customer concentration or small-business volatility. This approach is particularly well-suited for service companies, professional practices, and technology firms where future earnings are the key value drivers.

The market approach, on the other hand, focuses on comparing the business to similar companies that have recently been sold. CPAs use real-world transaction data and apply pricing multiples such as EV-to-EBITDA or price-to-revenue, adjusted for factors like company size, growth potential, and geographic differences. For instance, if comparable businesses sold at 4.0x–5.5x EBITDA but were larger and less risky, a CPA might apply a lower multiple - say 3.5x–4.5x - for a smaller, owner-dependent company. This method works especially well in industries with active mergers and acquisitions markets, such as landscaping, convenience stores, or franchise operations, where ample sales data is available.

Lastly, the asset-based approach calculates value by focusing on the company’s tangible assets. CPAs start by restating the balance sheet, adjusting the book value of assets like real estate, machinery, and inventory to reflect their current market value. They also account for off-balance-sheet items and ensure all liabilities, including contingent obligations, are included. For asset-heavy businesses like trucking companies, manufacturing plants, or real estate holding firms, this method is often the go-to. For example, a metal fabrication shop with $3 million in assets and $1 million in debt would have an equity value of $2 million - an insight that only the asset-based approach would highlight.

Benefits of Working with CPAs for Valuations

The detailed methods CPAs use translate into real advantages, offering more precise valuations and stronger support during transactions.

Better Accuracy and Trust

CPAs are known for delivering valuations that are both precise and trustworthy. Their expertise in financial accounting, tax laws, and business operations allows them to thoroughly analyze financial statements, identify key value drivers, and create reliable valuation models.[3] By conducting rigorous due diligence and adhering to strict ethical standards, CPAs can uncover critical financial issues and provide unbiased assessments.[1]

Because of their credentials and adherence to standards like the AICPA's Statement on Standards for Valuation Services (SSVS No. 1), CPA valuations carry more weight with financial institutions, courts, investors, and regulators.[3][5] For example, when securing bank financing, particularly SBA-backed loans in the U.S., lenders often require valuations from qualified professionals like CPA/ABVs. These professionals provide defensible fair market values that lenders trust.[10][8]

Tax Planning and Negotiation Support

CPAs bring added value through strategic tax planning, helping to structure deals in ways that minimize tax burdens and preserve value. They assess the tax implications of transactions - such as capital gains, income taxes, and existing liabilities - to ensure deals are as tax-efficient as possible.[1] For instance, in a business sale, CPAs might identify ways to reduce tax liabilities, potentially increasing net proceeds by 10–20% depending on the deal structure.[1] They can also model after-tax outcomes for buyers and sellers, helping decide between an asset sale and a stock sale or evaluating how installment payments and earn-outs impact finances.[1][3]

In negotiations, CPAs provide impartial, data-driven valuations that justify pricing and assess risks.[1] Their detailed reports often include supporting schedules and sensitivity analyses, such as projections based on different growth or margin scenarios. These insights help sellers secure better deals and assist buyers in avoiding overpayment.[1][3][4] This thorough approach highlights the contrast between CPA-led and non-CPA valuations.

CPA-Led vs. Non-CPA Valuations

The differences between CPA-led and non-CPA valuations are clear when compared side by side:

Aspect	CPA-Led Valuations	Non-CPA Valuations
Accuracy	High; uses standardized methods, normalized financials, and detailed risk assessment[1][7]	Variable; often based on rules of thumb or simple multiples with limited adjustments[3][9]
Objectivity	Strong; follows professional codes, independence rules, and AICPA valuation standards[3][5]	Lower; compensation may depend on transaction value, creating potential bias[3][9]
Time Requirements	4–8 weeks; involves thorough data collection, analysis, and review[1][6]	1–4 weeks; faster but often lacks detailed due diligence[9]
Costs	$5,000–$25,000+ depending on complexity; helps avoid future disputes[2][9]	$1,000–$10,000; cheaper upfront but may lead to higher long-term costs[9]
Defensibility	Produces formal, standards-based reports accepted by banks, courts, IRS, and investors[3][5][10]	Often produces informal estimates that may not hold up under scrutiny[3][5][9]

While CPA-led valuations may take more time and require a larger initial investment, they provide in-depth, defensible reports. These reports can actually streamline transactions by reducing back-and-forth with lenders or advisors, who are more likely to accept well-documented valuations.[3][10] For U.S. businesses, this level of detail is often essential for SBA financing, IRS compliance (like estate and gift taxes), ESOPs, and shareholder agreements - situations where accuracy and documentation are non-negotiable.[3][5][10][8]

God Bless Retirement's CPA Network for Business Valuations

Access to Experienced CPAs for Certified Valuations

God Bless Retirement has built a trusted network of U.S.-based CPAs who specialize in business valuations and transaction support for companies with EBITA under $25 million. These professionals hold active CPA licenses and advanced valuation credentials, including CVA, ABV, and ASA, which showcase their expertise in income, market, and asset-based valuation methods. Their in-house experts are certified by NACVA, ensuring compliance with standards recognized by buyers, sellers, banks, courts, and even the IRS.

The company takes a tailored approach by matching business owners with CPAs whose skills align with the industry, transaction size, and specific goals - whether it’s a sale, recapitalization, succession planning, or M&A. This process ensures the CPA understands the unique challenges faced by lower middle-market businesses, such as owner dependency, customer concentration risks, or non-recurring expenses. The outcome? A well-supported valuation report that not only strengthens pricing strategies but also gives business owners an edge during buyer negotiations. By aligning expertise with business needs, this network delivers precision and reliability throughout the valuation process.

Comprehensive Brokerage Services

God Bless Retirement also provides full M&A support, guiding clients through every stage of the transaction. From sourcing qualified buyers and sellers to preparing confidential marketing materials, they handle critical tasks like NDAs, LOIs, CIMs, and closing negotiations. Their use of secure data rooms ensures sensitive information is only accessible to pre-qualified parties who have signed confidentiality agreements, safeguarding operational privacy.

What sets their approach apart is the seamless integration of CPAs into the transaction process. These experts stay involved from the initial valuation to the final closing, addressing buyer questions during due diligence, refining financial projections to reflect changing market conditions, and advising on tax-efficient deal structures. Whether it’s deciding between an asset or stock sale, installment payments, or earnouts, the goal is always to maximize after-tax proceeds for sellers. By coordinating valuation, buyer outreach, and deal structuring, God Bless Retirement ensures transactions stay on track, close on favorable terms, and maintain the confidentiality needed to protect the business’s value.

Conclusion

Bringing CPA expertise into the mix directly tackles the valuation challenges outlined earlier. CPAs provide precise valuations through detailed financial analysis and adherence to strict ethical standards. They interpret financial statements, evaluate risks, forecast cash flows, and apply established valuation methods that hold up under scrutiny - whether it's from buyers, lenders, the IRS, or even in court. Skipping this expertise can lead to informal estimates that may result in overpricing, underpricing, or deals falling apart when financial discrepancies emerge during due diligence. Beyond just crunching numbers, CPAs also design deal structures to reduce tax burdens and model scenarios to maximize after-tax gains for sellers.

God Bless Retirement incorporates CPA expertise at every stage of the transaction process. Their team of U.S.-based CPAs, holding credentials like CVA, ABV, and ASA, works hand-in-hand with the brokerage team. From performing certified valuations to supporting due diligence, negotiating with buyers, and finalizing deals, this collaboration ensures every financial, tax, and structural detail is managed seamlessly. This approach is particularly valuable for businesses with EBITA under $25 million, keeping transactions on course while maintaining strict confidentiality.

Involving a CPA early on can help avoid expensive missteps and strengthen your position during negotiations. God Bless Retirement’s integrated model - offering certified valuations, comprehensive M&A support, and access to specialized professionals - provides the precision, reliability, and strategic insight necessary to protect and enhance a business’s value throughout the process.

FAQs

Why should I use a CPA for a business valuation?

Hiring a CPA for a business valuation guarantees precise results, trustworthiness, and adherence to industry guidelines. With their specialized training, CPAs dive deep into financial data, delivering valuations that are dependable and often accepted by banks, courts, and the IRS.

Beyond their technical skills, CPAs offer a high degree of confidentiality and professionalism - essential when handling sensitive financial details. Their expertise makes them a key ally in managing the intricate process of business valuations with confidence.

Why are CPAs essential for accurate business valuations?

CPAs are essential when it comes to delivering accurate business valuations. They bring a deep understanding of financial analysis, tax laws, and specific industry standards to the table. Unlike brokers, who might depend on rough estimates, CPAs dive into the finer details - analyzing financial statements, cash flow patterns, and market trends - to deliver assessments that are both precise and dependable.

This meticulous process doesn't just add credibility to the valuation; it also equips business owners with the insights they need to make smart decisions, whether they're looking to sell, merge, or acquire a business. Such attention to detail becomes even more crucial for companies with intricate financial setups or those aiming to optimize their market value.

Why is the income approach ideal for valuing service-based businesses?

The income approach works well for valuing service-based businesses because it zeroes in on their future earning potential. Unlike asset-heavy industries, service businesses often depend more on cash flow and income streams than on tangible assets, making this method a natural fit.

By examining projected earnings and cash flow, this approach gives a solid understanding of how the business can generate revenue over time. This is especially important for service companies, where factors like expertise, strong client relationships, and recurring revenue significantly influence their value.