The Ultimate Accounting Firm Metrics & Valuation FAQ: 150+ Questions Answered (2026 Edition)
Why I Created This Guide
I've spent years working with accounting firm owners on growth and valuation strategy. And I've noticed something: the same questions come up again and again.
"What's a good realization rate?" "How do I calculate revenue per employee?" "What multiple should I expect when I sell?"
So I compiled every question I've ever been asked—and plenty more—into this single resource. Whether you're benchmarking your firm, preparing for a sale, or just trying to understand what that consultant keeps talking about, you'll find your answer here.
Bookmark this page. You'll be back.
— Marc Howard, Founder of Firmlever
Table of Contents
- Revenue & Profitability Questions
- Efficiency & Utilization Questions
- Billing & Collection Questions
- Client & Growth Questions
- Valuation Questions
- M&A Deal Structure Questions
- Industry Terms & Lingo Questions
Revenue & Profitability Questions
What is revenue per employee in an accounting firm?
Revenue per employee (RPE) measures how much revenue each full-time equivalent staff member generates. Calculate it by dividing total annual revenue by the number of FTEs. A firm with $2 million in revenue and 10 employees has an RPE of $200,000.
What is a good revenue per employee for an accounting firm?
A good revenue per employee for accounting firms is $150,000 to $200,000. Top-performing firms achieve $200,000 to $300,000 or higher. Firms below $100,000 per employee typically have efficiency or pricing problems.
How do you calculate revenue per employee?
Divide your firm's total annual revenue by the number of full-time equivalent employees. The formula is: Revenue Per Employee = Total Annual Revenue ÷ Total FTEs.
What is revenue per partner?
Revenue per partner measures how much revenue each equity partner generates. Calculate it by dividing total firm revenue by the number of equity partners. This metric reveals partner productivity and firm leverage.
What is a good revenue per partner for a CPA firm?
Average accounting firms generate $500,000 to $800,000 per partner. High-performing firms reach $1 million to $2 million per partner. Top 100 firms often exceed $2 million per partner.
What is profit per partner?
Profit per partner (PPP) is the net firm profit divided by the number of equity partners. It represents what each partner actually takes home and is considered the ultimate measure of partner-level financial success.
What is a good profit per partner for an accounting firm?
Average small firms see $150,000 to $300,000 profit per partner. Well-run mid-sized firms achieve $300,000 to $600,000. Elite performers reach $600,000 to $1 million or more.
What is EBITDA for an accounting firm?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operating profitability by removing non-operational expenses. EBITDA is the primary profit metric used in accounting firm valuations.
How do you calculate EBITDA for an accounting firm?
Add back interest, taxes, depreciation, and amortization to net income. The formula is: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization.
What is a good EBITDA margin for an accounting firm?
Average accounting firms have EBITDA margins of 20% to 30%. Well-managed firms achieve 30% to 40%. Elite performers exceed 40% EBITDA margin.
How do you calculate EBITDA margin?
Divide EBITDA by total revenue and multiply by 100. The formula is: EBITDA Margin = (EBITDA ÷ Total Revenue) × 100.
What is gross margin for an accounting firm?
Gross margin is revenue minus direct labor costs, divided by revenue. It shows how much revenue remains after paying the people who deliver client work.
What is net profit margin for an accounting firm?
Net profit margin is net profit divided by total revenue, expressed as a percentage. It's the bottom-line indicator of firm profitability after all expenses.
What is a good net profit margin for an accounting firm?
Struggling firms have margins under 15%. Average firms achieve 15% to 25%. High performers reach 25% to 40% net profit margin.
What is overhead rate in an accounting firm?
Overhead rate is total overhead expenses divided by total revenue. Overhead includes rent, utilities, insurance, technology, marketing, and administrative costs not directly tied to client work.
What is a good overhead rate for an accounting firm?
Efficient firms maintain 35% to 45% overhead rates. Average firms run 45% to 55%. Firms above 55% overhead are typically inefficient.
Efficiency & Utilization Questions
What is realization rate in accounting?
Realization rate is the percentage of standard (rack rate) fees actually billed to clients. It measures how much of your potential revenue you actually capture.
How do you calculate realization rate?
Divide actual fees billed by the standard fees at rack rate, then multiply by 100. The formula is: Realization Rate = (Actual Fees Billed ÷ Standard Fees at Rack Rate) × 100.
What is a good realization rate for an accounting firm?
A good realization rate is 92% to 98%. Rates of 85% to 92% are average. Rates below 85% indicate significant pricing or efficiency problems.
Why is my realization rate low?
Low realization typically results from excessive discounting, scope creep without fee adjustments, inefficient staff, poor time tracking, underpriced engagements, or difficult clients requiring write-offs.
What is collection rate in accounting?
Collection rate is the percentage of billed fees actually collected from clients. It measures how effectively you convert invoices into cash.
How do you calculate collection rate?
Divide cash collected by total fees billed, then multiply by 100. The formula is: Collection Rate = (Cash Collected ÷ Total Fees Billed) × 100.
What is a good collection rate for an accounting firm?
Excellent firms achieve 98% or higher collection rates. Acceptable rates range from 95% to 98%. Rates below 95% signal client payment issues or billing disputes.
What is utilization rate in accounting?
Utilization rate is the percentage of available work hours spent on billable client work. It measures how effectively your team's time converts to revenue-generating activity.
How do you calculate utilization rate?
Divide billable hours by total available hours, then multiply by 100. The formula is: Utilization Rate = (Billable Hours ÷ Total Available Hours) × 100.
What is a good utilization rate for accounting staff?
Entry-level staff should target 80% to 90% utilization. Senior staff should achieve 70% to 85%. Managers typically hit 60% to 75%. Partners range from 40% to 60% due to business development and management duties.
What is effective billing rate?
Effective billing rate is your actual hourly earnings after accounting for realization and collection losses. It's often much lower than your standard rate.
How do you calculate effective billing rate?
Multiply your standard rate by your realization rate and collection rate. The formula is: Effective Billing Rate = Standard Rate × Realization Rate × Collection Rate.
What is chargeability rate?
Chargeability rate measures hours charged to clients versus total hours worked. It's similar to utilization but focuses specifically on time actually charged rather than available time.
What is write-off rate in accounting?
Write-off rate is the percentage of work-in-progress or billed time that gets written off—either not billed or reversed after billing.
What is a good write-off rate for an accounting firm?
Healthy firms keep write-offs under 5%. Rates of 5% to 10% are concerning. Rates over 10% indicate serious pricing, staffing, or client selection problems.
What is work-in-progress (WIP) in accounting?
Work-in-progress is unbilled time and expenses that have been incurred but not yet invoiced to clients. WIP represents trapped cash that hasn't been converted to receivables.
What are WIP days?
WIP days measure the average number of days between completing work and billing the client. Calculate by dividing average WIP balance by annual revenue, then multiplying by 365.
What is a good WIP days number?
Excellent firms maintain WIP days under 15. Good firms stay between 15 and 30 days. WIP days over 30 are concerning and hurt cash flow.
What are accounts receivable days?
Accounts receivable days (A/R days) measure the average number of days it takes to collect payment after billing. Calculate by dividing average A/R balance by annual revenue, then multiplying by 365.
What is a good A/R days number for an accounting firm?
Excellent firms collect in under 30 days. Acceptable A/R days range from 30 to 45. A/R days over 45 tie up cash and increase bad debt risk.
What are lockup days?
Lockup days combine WIP days plus A/R days—the complete cycle from doing work to receiving cash. It measures total cash conversion time.
How do you calculate lockup days?
Add WIP days and A/R days together. The formula is: Lockup Days = WIP Days + A/R Days.
What is a good lockup days number?
Best-in-class firms achieve lockup under 45 days. Average firms range from 60 to 90 days. Lockup over 90 days creates serious cash flow problems.
What is staff leverage ratio?
Staff leverage ratio is the number of professional staff divided by the number of partners. It measures how much work partners can delegate and oversee.
What is a good staff leverage ratio?
Low leverage is 2:1 or less. Moderate leverage ranges from 3:1 to 5:1. High leverage is 6:1 or higher. Higher leverage generally means better profitability but requires strong systems.
What is staff turnover rate?
Staff turnover rate is the percentage of employees who leave the firm within a given period. Calculate by dividing departures by average total employees, then multiplying by 100.
What is a good turnover rate for an accounting firm?
Public accounting averages 15% to 25% turnover. Well-run firms stay under 15%. Turnover over 25% signals cultural or compensation problems.
What is capacity utilization?
Capacity utilization is the percentage of total firm capacity (available hours across all staff) being used. It indicates whether you're overstaffed, understaffed, or right-sized.
Billing & Collection Questions
What is a blended rate in accounting?
A blended rate is the weighted average billing rate across all firm personnel. Calculate by dividing total revenue by total billable hours.
What is rack rate in accounting?
Rack rate (also called standard rate) is the full, undiscounted hourly rate for a particular staff level. It's the baseline for measuring realization.
What is a fixed fee engagement?
A fixed fee (or flat fee) engagement has a predetermined price for a defined scope of work, regardless of time incurred. The firm accepts the risk but can be highly profitable with good scoping.
What is value pricing in accounting?
Value pricing sets fees based on the value delivered to the client rather than time incurred. It can dramatically improve realization when implemented well.
What is scope creep?
Scope creep is the gradual expansion of work beyond the original engagement scope, often without corresponding fee adjustments. It's a major profit killer in accounting firms.
What is a change order?
A change order is a formal document adjusting the scope and price of an engagement when work expands beyond original terms. Proper change order discipline prevents scope creep.
What is an engagement letter?
An engagement letter is a written agreement between firm and client defining the scope, terms, and fees for services. It's critical for scope management and liability protection.
Client & Growth Questions
What is organic growth rate?
Organic growth rate measures revenue growth from existing operations, excluding acquisitions. It shows a firm's ability to grow through sales, client expansion, and service additions.
What is a good organic growth rate for an accounting firm?
Stagnant firms grow 0% to 3%. Healthy growth is 5% to 10%. Strong growth is 10% to 15%. Exceptional firms grow 15% or more organically.
What is client acquisition cost (CAC)?
Client acquisition cost is the total cost to acquire a new client, including marketing, sales, and business development expenses. Calculate by dividing total sales and marketing costs by new clients acquired.
What is client lifetime value (CLV)?
Client lifetime value is the total revenue expected from a client over the entire relationship. Calculate by multiplying average annual revenue per client by average client lifespan in years.
What is a good CLV to CAC ratio?
A healthy CLV to CAC ratio is 3:1 to 5:1. Ratios under 3:1 suggest you're overspending on acquisition. Ratios above 5:1 indicate efficient acquisition or potential underinvestment in growth.
What is client retention rate?
Client retention rate is the percentage of clients retained over a given period. Calculate by subtracting new clients from ending clients, dividing by starting clients, then multiplying by 100.
What is a good client retention rate for an accounting firm?
Poor retention is under 85%. Good retention is 90% to 95%. Excellent retention exceeds 95%.
What is client churn rate?
Client churn rate is the percentage of clients lost over a period—the inverse of retention. Calculate by dividing lost clients by starting clients, then multiplying by 100.
What is net revenue retention (NRR)?
Net revenue retention measures revenue kept from existing clients, including expansions and contractions, as a percentage of prior-period revenue from those same clients.
What is a good net revenue retention rate?
NRR below 90% is concerning. 90% to 100% is stable. 100% to 110% is strong. NRR above 110% is exceptional and means existing clients generate more revenue year-over-year.
What is average revenue per client?
Average revenue per client (ARPC) is total revenue divided by number of active clients. It tracks whether you're moving upmarket or if your client base is commoditizing.
What is revenue concentration?
Revenue concentration measures the percentage of revenue derived from your largest clients. High concentration creates risk if major clients leave.
What is dangerous client concentration?
Any single client over 10% of revenue creates risk. Top 5 clients over 40% is high risk. A top client over 20% is critical risk that can significantly reduce valuation.
What is client grading?
Client grading classifies clients (typically A/B/C/D) based on profitability, ease of service, payment history, and growth potential. It helps with pricing, resource allocation, and identifying clients to terminate.
What is Net Promoter Score (NPS)?
Net Promoter Score measures client loyalty based on how likely clients are to recommend your firm on a 0-10 scale. Calculate by subtracting the percentage of detractors (0-6) from promoters (9-10).
What is a good NPS for an accounting firm?
NPS below 0 indicates critical issues. 0 to 30 is average. 30 to 50 is good. NPS above 50 is excellent.
What is referral rate?
Referral rate is the percentage of new clients acquired through referrals from existing clients. High referral rates indicate strong satisfaction and reduce acquisition costs.
What is recurring revenue percentage?
Recurring revenue percentage is the portion of total revenue that's predictable and recurring versus one-time or project-based work.
What is a good recurring revenue percentage?
Traditional tax firms typically have 50% to 70% recurring revenue. Advisory-focused firms range from 30% to 60%. CAS-heavy firms achieve 70% to 90% recurring revenue.
What is advisory mix?
Advisory mix is the percentage of revenue from advisory and consulting services versus traditional compliance work like tax prep and audits.
Why does advisory mix matter?
Higher advisory mix typically means higher margins, less commoditization, stickier client relationships, and premium valuations.
Valuation Questions
How is an accounting firm valued?
Accounting firms are valued using multiples of revenue, EBITDA, or seller's discretionary earnings (SDE). The method depends on firm size, and valuations consider revenue quality, client concentration, growth trends, and transferability.
What is a valuation multiple?
A valuation multiple is a factor applied to a financial metric (usually revenue or EBITDA) to estimate firm value. Common multiples include revenue multiples (0.8x-1.5x) and EBITDA multiples (4x-8x).
What multiple do accounting firms sell for?
Accounting firms typically sell for 0.8x to 1.5x revenue, or 3x to 8x EBITDA. Multiples vary based on size, growth, client concentration, service mix, and other quality factors.
What is a good revenue multiple for an accounting firm?
Small traditional firms typically sell at 0.8x to 1.0x revenue. Well-run firms achieve 1.0x to 1.25x. Premium firms with high growth and CAS services can reach 1.25x to 1.5x or higher.
What is a good EBITDA multiple for an accounting firm?
Small firms typically sell at 3x to 5x EBITDA. Mid-sized firms achieve 5x to 7x. Large, well-run firms reach 6x to 8x. PE platform acquisitions can exceed 7x to 10x EBITDA.
What is seller's discretionary earnings (SDE)?
SDE is net profit plus owner's salary, benefits, and discretionary expenses that a new owner wouldn't necessarily incur. It represents the total benefit to an owner-operator.
How do you calculate SDE?
Add owner's compensation, benefits, and discretionary expenses to net profit. The formula is: SDE = Net Profit + Owner's Compensation + Owner's Benefits + Discretionary Expenses.
What is a good SDE multiple for an accounting firm?
SDE multiples typically range from 2.0x to 4.0x, with most deals falling between 2.5x and 3.0x SDE.
What are normalized earnings?
Normalized earnings are adjusted to remove one-time, non-recurring, or owner-specific items to show true ongoing profitability that a buyer can expect.
What are add-backs in a valuation?
Add-backs are expenses added back to profit during valuation because they're discretionary, non-recurring, or wouldn't continue under new ownership. Examples include above-market owner compensation and personal expenses.
What are common add-backs in accounting firm valuations?
Common add-backs include above-market owner salary, owner's car and travel expenses, one-time legal or consulting fees, non-recurring equipment purchases, and family member salaries above market rate.
What is enterprise value?
Enterprise value (EV) is the total value of a business, including equity value plus debt minus cash. It represents the full acquisition cost for a buyer.
What is fair market value?
Fair market value (FMV) is the price at which a business would change hands between a willing buyer and seller, both having reasonable knowledge of relevant facts.
What is book value of an accounting firm?
Book value is net asset value—total assets minus total liabilities. For accounting firms, book value is usually far less than market value because client relationships aren't on the balance sheet.
What is goodwill in an accounting firm sale?
Goodwill is the portion of purchase price exceeding the fair value of identifiable assets. In accounting firm deals, goodwill typically represents client relationships and firm reputation.
What is revenue quality?
Revenue quality assesses how sustainable, predictable, and transferable a firm's revenue is. Factors include recurring versus one-time revenue, concentration risk, and client stickiness.
What is transferability in accounting firm valuation?
Transferability is the likelihood that clients will stay with the firm after transition to new ownership. High transferability means higher value.
What improves transferability?
Transferability improves with deep staff relationships (not just owner), long client tenure, sticky services like CAS and payroll, documented processes, and willing seller participation in transition.
What is client concentration risk?
Client concentration risk is the danger that losing one or a few large clients would significantly impact firm revenue. High concentration reduces valuations.
M&A Deal Structure Questions
What is an earnout?
An earnout is a portion of the purchase price contingent on future performance, usually tied to revenue retention or growth targets over 2-4 years.
How do earnouts work in accounting firm sales?
Typically 20% to 40% of deal value is structured as an earnout paid over 2-4 years, triggered when retention thresholds (often 85%-90%) are met.
What is retention rate in M&A?
In M&A context, retention rate is the percentage of acquired revenue that remains with the firm post-acquisition. Most deals expect 85% to 95% retention over 2-3 years.
What is due diligence?
Due diligence is the comprehensive investigation a buyer conducts before acquiring a firm. It covers financial, client, staff, operational, and legal areas.
What is a letter of intent (LOI)?
A letter of intent is a preliminary, often non-binding document outlining key terms of a proposed acquisition including purchase price, deal structure, and due diligence period.
What is an asset purchase vs. stock purchase?
An asset purchase acquires specific assets and liabilities (most common for smaller deals). A stock purchase acquires ownership of the entity, inheriting all assets and liabilities.
Which is better: asset purchase or stock purchase?
Asset purchases typically favor buyers for tax advantages and liability protection. Stock purchases may be required for certain contracts or licenses. Structure significantly impacts tax treatment for both parties.
What is a working capital adjustment?
A working capital adjustment is a post-closing price adjustment based on actual working capital (current assets minus current liabilities) delivered at closing.
What are representations and warranties?
Representations and warranties are statements made by the seller about the business, such as accuracy of financials, no undisclosed liabilities, and valid client contracts, upon which the buyer relies.
What is indemnification in M&A?
Indemnification is the seller's obligation to compensate the buyer for losses arising from breaches of representations or undisclosed liabilities discovered post-closing.
What is escrow in M&A?
Escrow is a portion of purchase price (typically 10%-20%) held by a third party for 12-24 months to satisfy potential indemnification claims.
What is a non-compete agreement?
A non-compete agreement prevents the seller from competing with the acquired business for a specified period (typically 3-5 years) and geographic area.
What is a non-solicitation agreement?
A non-solicitation agreement prevents the seller from soliciting the firm's employees or clients after the sale.
What is a transition period?
A transition period is a defined time (typically 6 months to 2 years) after closing during which the seller assists with client transitions, introductions, and knowledge transfer.
What is a roll-up?
A roll-up is an acquisition strategy where a buyer consolidates multiple smaller firms into a larger entity to create scale and improve margins.
What is a platform acquisition?
A platform acquisition is the initial, typically larger acquisition in a roll-up strategy that serves as the foundation for future add-on acquisitions.
What is a tuck-in acquisition?
A tuck-in (or add-on) acquisition is a smaller firm integrated into an existing platform. Tuck-ins are often acquired at lower multiples than the platform's implied value.
What is a merger of equals?
A merger of equals combines two similar-sized firms without a clear buyer/seller dynamic. It can be politically acceptable but requires careful governance planning.
What is private equity in accounting?
Private equity firms acquire accounting practices through roll-up strategies, building scale with the goal of eventually exiting at a higher valuation. PE has transformed accounting M&A and often pays premium prices.
What is a strategic buyer?
A strategic buyer is an acquirer already in the accounting industry seeking synergies like geographic expansion, service line additions, or talent acquisition.
What is a financial buyer?
A financial buyer (typically PE) focuses primarily on financial returns rather than operational synergies. They emphasize metrics, growth potential, and management team quality.
Industry Terms & Lingo Questions
What is a book of business?
A book of business is the collection of client relationships and associated revenue attributed to a specific person—partner, manager, or the firm overall.
What does "eat what you kill" mean?
"Eat what you kill" is a partner compensation model where partners earn based primarily on business they personally originate and manage. It incentivizes business development but can hinder collaboration.
What is a rainmaker?
A rainmaker is a partner or employee particularly skilled at originating new business. Rainmakers drive growth but can create key-person risk.
What is bench strength?
Bench strength is the depth and quality of talent below partner level ready to step into senior roles. Strong bench strength reduces risk and supports growth.
What is key person risk?
Key person risk (or key man risk) is the danger that firm value is overly dependent on one or a few individuals. High key-person risk reduces valuations.
What is CAS in accounting?
CAS stands for Client Accounting Services—a model where the firm provides ongoing outsourced accounting functions including bookkeeping, controller, and CFO services. CAS is recurring, sticky, and commands premium valuations.
What are CFO services?
CFO services (also called virtual CFO or fractional CFO) provide high-level financial strategy and advisory on a part-time or outsourced basis. They're high-value services that move firms up the value chain.
What is advisory services in accounting?
Advisory services are non-compliance services focused on helping clients make decisions, including business consulting, financial planning, transaction support, and strategic advice.
What is compliance work?
Compliance work includes required, regulatory-driven services like tax preparation, audits, and statutory filings. It's the foundation of most firms but increasingly commoditized.
What is offshoring in accounting?
Offshoring uses staff in other countries (typically lower-cost regions) for accounting work. It can improve margins but raises quality and client perception concerns.
What is nearshoring?
Nearshoring uses staff in closer time zones (like Latin America for U.S. firms) to balance cost savings with easier collaboration than distant offshoring.
What does "moving upmarket" mean?
Moving upmarket is a strategy of targeting larger, higher-revenue clients who typically offer better economics and more advisory opportunities.
What is a firm's sweet spot?
A firm's sweet spot is the ideal client profile where the firm is most profitable and effective. Knowing your sweet spot improves targeting and satisfaction.
What is practice management?
Practice management encompasses the systems, processes, and software used to run the operational side of an accounting firm.
What is succession planning?
Succession planning prepares for ownership and leadership transition, whether internal promotion or external sale. Firms that plan early achieve better outcomes.
What is partner buy-in?
Partner buy-in is the payment made by a new partner to acquire an equity stake in the firm. Structures vary widely across firms.
What is a partner capital account?
A partner capital account is the accumulated equity balance each partner has in the firm, typically based on buy-in plus retained earnings.
What is bandwidth in business context?
Bandwidth refers to available capacity to take on additional work. "We don't have the bandwidth" means the team is at capacity.
What is white-label services?
White-label services are delivered to clients under your firm's brand but actually performed by a third party. They allow offering services without building in-house capability.
What is busy season?
Busy season (or tax season) is the period of highest workload, typically January through April for most accounting firms.
Quick Reference Formulas
How do you calculate revenue per employee?
Formula: Total Annual Revenue ÷ Total FTEs
How do you calculate profit per partner?
Formula: Net Profit ÷ Number of Equity Partners
How do you calculate EBITDA?
Formula: Net Income + Interest + Taxes + Depreciation + Amortization
How do you calculate realization rate?
Formula: (Actual Fees Billed ÷ Standard Fees at Rack Rate) × 100
How do you calculate utilization rate?
Formula: (Billable Hours ÷ Total Available Hours) × 100
How do you calculate collection rate?
Formula: (Cash Collected ÷ Total Fees Billed) × 100
How do you calculate lockup days?
Formula: WIP Days + A/R Days
How do you calculate client retention rate?
Formula: ((Clients at End − New Clients) ÷ Clients at Start) × 100
How do you calculate client acquisition cost?
Formula: Total Sales & Marketing Costs ÷ Number of New Clients
How do you calculate client lifetime value?
Formula: Average Annual Revenue Per Client × Average Client Lifespan (years)
How do you calculate SDE?
Formula: Net Profit + Owner's Compensation + Owner's Benefits + Discretionary Expenses
How do you calculate NPS?
Formula: % Promoters (9-10 ratings) − % Detractors (0-6 ratings)
Final Thoughts
You now have answers to virtually every question about accounting firm metrics, KPIs, and valuation terms. But having answers isn't the same as taking action.
Here's my challenge: Pick three metrics you're not currently tracking. Start measuring them this month. You can't improve what you don't measure.
If you found this useful, share it with a colleague. And if you want help applying these concepts to your specific situation—whether that's improving efficiency, preparing for sale, or evaluating an acquisition—that's what we do at Firmlever.
— Marc Howard Founder, Firmlever
