The Ultimate Glossary of Accounting Firm Metrics, KPIs & Valuation Terms (2026 Edition)

Here's the thing about running or growing an accounting firm—the terminology can feel like a foreign language.

When I started working with accounting firm owners on growth strategy and valuations, I noticed something: brilliant CPAs who could navigate the most complex tax scenarios often struggled when conversations shifted to "realization rates," "SDE multiples," or "lockup days."

And honestly? That's not their fault. This vocabulary wasn't taught in accounting school. It lives in the conversations between practice management consultants, M&A advisors, and PE buyers—and it evolves constantly.

So I built this glossary.

What you'll find here:

• Every meaningful metric used to measure accounting firm performance
• The valuation terms you'll encounter if you ever buy, sell, or merge
• The industry lingo that gets thrown around in conferences, webinars, and boardrooms
• Actual formulas you can apply today
• Real-world examples that make abstract concepts concrete

Whether you're a firm owner tracking performance, a buyer evaluating an acquisition, or a consultant advising clients—this is your reference guide.

Bookmark it. Share it with your team. Come back to it.

Let's dive in.

How to Use This Glossary

This guide is organized into four main sections:

1. Financial Performance Metrics — The numbers that tell you how healthy your firm is
2. Operational Efficiency Metrics — The indicators that reveal how well you're running things
3. Growth & Client Metrics — The measures that show trajectory and client health
4. Valuation & M&A Terms — The vocabulary of buying, selling, and merging firms

Each entry includes:

• A clear definition
• The formula (where applicable)
• Why it matters
• A practical example

Use Ctrl+F (or Cmd+F on Mac) to search for specific terms.

Part 1: Financial Performance Metrics

Revenue Per Employee (RPE)

Definition: Total firm revenue divided by the number of full-time equivalent (FTE) employees.

Formula:

RPE = Total Annual Revenue ÷ Total FTEs

Why It Matters: RPE is one of the most-watched efficiency metrics in the profession. It tells you how much economic output each team member generates. Higher RPE typically indicates better leverage, pricing, and operational efficiency.

Benchmarks:

• Small firms (under $1M): $100,000–$150,000
• Mid-sized firms ($1M–$5M): $150,000–$200,000
• Top-performing firms: $200,000–$300,000+

Example: A firm with $2.4 million in revenue and 12 FTEs has an RPE of $200,000—a solid number indicating good efficiency.

Revenue Per Partner (RPP)

Definition: Total firm revenue divided by the number of equity partners.

Formula:

RPP = Total Annual Revenue ÷ Number of Equity Partners

Why It Matters: This metric reveals partner productivity and provides insight into the firm's leverage model. Firms with high RPP typically have strong staff leverage and efficient partner utilization.

Benchmarks:

• Average firms: $500,000–$800,000
• High-performing firms: $1,000,000–$2,000,000+
• Top 100 firms: Often $2,000,000+

Example: A three-partner firm generating $2.7 million has an RPP of $900,000—above average and approaching high-performing territory.

Profit Per Partner (PPP)

Definition: Net firm profit divided by the number of equity partners. The ultimate measure of partner-level financial success.

Formula:

PPP = Net Profit (after all expenses) ÷ Number of Equity Partners

Why It Matters: PPP is what partners actually take home. Two firms can have identical revenue but vastly different PPP based on their cost structures and efficiency.

Benchmarks:

• Average small firms: $150,000–$300,000
• Well-run mid-sized firms: $300,000–$600,000
• Elite performers: $600,000–$1,000,000+

Example: A firm with $400,000 in net profit and two partners has a PPP of $200,000.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

Definition: A measure of operating profitability that strips out non-operational expenses to show core business performance.

Formula:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

Why It Matters: EBITDA is the primary profit metric used in accounting firm valuations. Buyers use it to compare firms on an apples-to-apples basis regardless of capital structure or tax situations.

Example: A firm with $300,000 net income, $10,000 interest, $80,000 taxes, and $15,000 depreciation has EBITDA of $405,000.

EBITDA Margin

Definition: EBITDA expressed as a percentage of total revenue.

Formula:

EBITDA Margin = (EBITDA ÷ Total Revenue) × 100

Why It Matters: Shows what percentage of every revenue dollar converts to operating profit. Higher margins indicate better pricing power and cost control.

Benchmarks:

• Average firms: 20%–30%
• Well-managed firms: 30%–40%
• Elite performers: 40%+

Example: A firm with $500,000 EBITDA on $1.5M revenue has a 33% EBITDA margin.

Gross Margin

Definition: Revenue minus direct costs (primarily labor costs for client work) divided by revenue.

Formula:

Gross Margin = (Revenue - Direct Labor Costs) ÷ Revenue × 100

Why It Matters: Reveals how much revenue remains after paying for the people who do the work. Helps identify pricing or staffing issues.

Example: A firm with $1M revenue and $550,000 in direct labor costs has a 45% gross margin.

Net Profit Margin

Definition: Net profit divided by total revenue, expressed as a percentage.

Formula:

Net Profit Margin = (Net Profit ÷ Total Revenue) × 100

Why It Matters: The bottom-line indicator of firm profitability. Accounts for all expenses, not just operational ones.

Benchmarks:

• Struggling firms: Under 15%
• Average firms: 15%–25%
• High performers: 25%–40%

Overhead Rate (Overhead Ratio)

Definition: Total overhead expenses divided by total revenue, expressed as a percentage.

Formula:

Overhead Rate = (Total Overhead Expenses ÷ Total Revenue) × 100

What Counts as Overhead: Rent, utilities, insurance, technology, marketing, administrative salaries, professional development, and any expense not directly tied to client delivery.

Why It Matters: High overhead eats into profitability. Tracking this helps identify cost-cutting opportunities.

Benchmarks:

• Efficient firms: 35%–45%
• Average firms: 45%–55%
• Inefficient firms: 55%+

Example: A firm with $200,000 in overhead on $800,000 revenue has a 25% overhead rate—extremely lean.

Effective Tax Rate

Definition: Actual taxes paid divided by pre-tax income.

Formula:

Effective Tax Rate = (Taxes Paid ÷ Pre-Tax Income) × 100

Why It Matters: For pass-through entities (most accounting firms), understanding the effective rate helps with owner compensation planning and cash flow forecasting.

Part 2: Operational Efficiency Metrics

Realization Rate

Definition: The percentage of standard (rack rate) fees actually billed to clients.

Formula:

Realization Rate = (Actual Fees Billed ÷ Standard Fees at Rack Rate) × 100

Why It Matters: Low realization means you're discounting heavily or writing off time. It's one of the biggest profit leaks in accounting firms.

Benchmarks:

• Poor: Under 85%
• Average: 85%–92%
• Excellent: 92%–98%

Example: Your standard rate is $200/hour. A project takes 10 hours ($2,000 at rack rate), but you bill $1,700. Your realization rate is 85%.

Collection Rate (Collection Realization)

Definition: The percentage of billed fees actually collected from clients.

Formula:

Collection Rate = (Cash Collected ÷ Total Fees Billed) × 100

Why It Matters: Billing is one thing; getting paid is another. A low collection rate signals client payment issues or billing disputes.

Benchmarks:

• Concerning: Under 95%
• Acceptable: 95%–98%
• Excellent: 98%+

Example: You bill $100,000 but collect $96,000. Your collection rate is 96%.

Utilization Rate

Definition: The percentage of available work hours spent on billable client work.

Formula:

Utilization Rate = (Billable Hours ÷ Total Available Hours) × 100

Why It Matters: Measures how effectively your team's time converts to revenue-generating activity.

Benchmarks (for staff):

• Entry-level staff: 80%–90%
• Senior staff: 70%–85%
• Managers: 60%–75%
• Partners: 40%–60% (due to business development, management duties)

Example: A staff accountant has 2,080 available hours annually and logs 1,664 billable hours. Their utilization rate is 80%.

Effective Billing Rate

Definition: The actual hourly rate realized after accounting for realization and collection.

Formula:

Effective Billing Rate = Standard Rate × Realization Rate × Collection Rate

Why It Matters: This is your true hourly earnings. It's often sobering to calculate.

Example: Standard rate of $200 × 90% realization × 97% collection = $174.60 effective rate.

Chargeability Rate

Definition: Similar to utilization, but specifically measures hours charged to clients versus total hours worked.

Formula:

Chargeability Rate = (Hours Charged to Clients ÷ Total Hours Worked) × 100

Why It Matters: Some firms track "worked" hours differently than "available" hours. Chargeability focuses on actual time invested.

Write-Off Rate (Write-Down Rate)

Definition: The percentage of work-in-progress or billed time that gets written off (not billed or reversed after billing).

Formula:

Write-Off Rate = (Written Off Value ÷ Total WIP or Billed Value) × 100

Why It Matters: High write-offs signal pricing problems, scope creep, inefficient staff, or poor client selection.

Benchmarks:

• Healthy: Under 5%
• Concerning: 5%–10%
• Problematic: Over 10%

Work-in-Progress (WIP)

Definition: Unbilled time and expenses that have been incurred but not yet invoiced to clients.

Why It Matters: WIP represents trapped cash. Excessive WIP indicates billing delays, which hurt cash flow and increase write-off risk.

Best Practice: Bill promptly. Keep WIP days (average time from work completion to billing) under 30 days.

WIP Days

Definition: The average number of days between completing work and billing the client.

Formula:

WIP Days = (Average WIP Balance ÷ Annual Revenue) × 365

Why It Matters: Longer WIP cycles strain cash flow and increase the likelihood of client billing disputes.

Benchmarks:

• Excellent: Under 15 days
• Good: 15–30 days
• Concerning: 30+ days

Accounts Receivable (A/R) Days

Definition: The average number of days it takes to collect payment after billing.

Formula:

A/R Days = (Average A/R Balance ÷ Annual Revenue) × 365

Why It Matters: Extended A/R days tie up cash and increase bad debt risk.

Benchmarks:

• Excellent: Under 30 days
• Acceptable: 30–45 days
• Concerning: 45+ days

Lockup Days (Total Lockup)

Definition: The combined total of WIP days plus A/R days—the complete cycle from doing work to receiving cash.

Formula:

Lockup Days = WIP Days + A/R Days

Why It Matters: This is the true measure of cash conversion. Lower lockup means faster cash flow.

Benchmarks:

• Best-in-class: Under 45 days
• Average: 60–90 days
• Problematic: 90+ days

Example: If WIP days are 20 and A/R days are 35, total lockup is 55 days.

Staff Leverage Ratio

Definition: The ratio of professional staff to partners.

Formula:

Staff Leverage = Number of Professional Staff ÷ Number of Partners

Why It Matters: Higher leverage means partners can oversee more work, increasing profitability. Too much leverage can hurt quality and client relationships.

Benchmarks:

• Low leverage: 2:1 or less
• Moderate: 3:1 to 5:1
• High leverage: 6:1 or higher

Example: A firm with 2 partners and 8 professional staff has a 4:1 leverage ratio.

Partner Leverage

Definition: Revenue per partner divided by the average cost per partner—measures how effectively partners generate return on their own compensation.

Why It Matters: Shows whether partners are generating sufficient revenue relative to what they take out of the firm.

Capacity Utilization

Definition: The percentage of total firm capacity (available hours across all staff) being used.

Formula:

Capacity Utilization = (Total Billable Hours ÷ Total Available Hours Firm-Wide) × 100

Why It Matters: Indicates whether you're overstaffed, understaffed, or right-sized.

Staff Turnover Rate

Definition: The percentage of employees who leave the firm within a given period.

Formula:

Turnover Rate = (Number of Departures ÷ Average Total Employees) × 100

Why It Matters: High turnover is expensive (recruiting, training, lost productivity) and signals cultural or compensation issues.

Benchmarks:

• Public accounting average: 15%–25%
• Well-run firms: Under 15%
• Concerning: Over 25%

Training Investment Per Employee

Definition: Total training and professional development spending divided by number of employees.

Formula:

Training Investment = Total CPE/Training Spend ÷ Number of FTEs

Why It Matters: Investment in people correlates with retention, quality, and ability to command premium fees.

Part 3: Growth & Client Metrics

Organic Growth Rate

Definition: Revenue growth from existing operations, excluding acquisitions.

Formula:

Organic Growth Rate = ((Current Year Revenue - Prior Year Revenue - Acquired Revenue) ÷ Prior Year Revenue) × 100

Why It Matters: True measure of a firm's ability to grow through sales, client expansion, and service additions.

Benchmarks:

• Stagnant: 0%–3%
• Healthy: 5%–10%
• Strong: 10%–15%
• Exceptional: 15%+

Client Acquisition Cost (CAC)

Definition: Total cost to acquire a new client, including marketing, sales, and business development expenses.

Formula:

CAC = Total Sales & Marketing Costs ÷ Number of New Clients Acquired

Why It Matters: Helps evaluate the efficiency of your business development efforts and marketing investments.

Example: If you spend $50,000 on marketing and BD and acquire 25 new clients, your CAC is $2,000.

Client Lifetime Value (CLV or LTV)

Definition: The total revenue expected from a client over the entire relationship.

Formula:

CLV = Average Annual Revenue Per Client × Average Client Lifespan (in years)

Why It Matters: Understanding CLV helps with client selection and justifies acquisition investments.

Example: A client billing $15,000/year with an average 8-year relationship has a CLV of $120,000.

CLV:CAC Ratio

Definition: The ratio of client lifetime value to client acquisition cost.

Formula:

CLV:CAC = Client Lifetime Value ÷ Client Acquisition Cost

Why It Matters: Indicates the return on your client acquisition investment.

Benchmarks:

• Poor: Under 3:1
• Healthy: 3:1 to 5:1
• Excellent: 5:1+

Client Retention Rate

Definition: The percentage of clients retained over a given period.

Formula:

Retention Rate = ((Clients at End - New Clients Acquired) ÷ Clients at Start) × 100

Why It Matters: Retention is far more profitable than acquisition. High retention indicates client satisfaction and sticky services.

Benchmarks:

• Poor: Under 85%
• Good: 90%–95%
• Excellent: 95%+

Client Churn Rate

Definition: The inverse of retention—the percentage of clients lost over a period.

Formula:

Churn Rate = (Lost Clients ÷ Clients at Start of Period) × 100

Why It Matters: Identifies the rate of client attrition. High churn is a warning sign.

Net Revenue Retention (NRR)

Definition: Revenue retained from existing clients, including expansions and contractions, expressed as a percentage of prior-period revenue from those same clients.

Formula:

NRR = ((Starting Revenue + Expansions - Contractions - Churned Revenue) ÷ Starting Revenue) × 100

Why It Matters: NRR over 100% means existing clients are generating more revenue year-over-year, even before new client acquisition.

Benchmarks:

• Below 90%: Concerning
• 90%–100%: Stable
• 100%–110%: Strong
• 110%+: Exceptional

Average Revenue Per Client (ARPC)

Definition: Total revenue divided by number of active clients.

Formula:

ARPC = Total Revenue ÷ Number of Active Clients

Why It Matters: Tracks whether you're successfully moving upmarket or if your client base is commoditizing.

Revenue Concentration

Definition: The percentage of revenue derived from your largest clients.

Formula:

Top Client Concentration = (Revenue from Top X Clients ÷ Total Revenue) × 100

Why It Matters: High concentration is a risk factor—losing a major client can be catastrophic.

Red Flags:

• Any single client over 10%: Risk
• Top 5 clients over 40%: High risk
• Top client over 20%: Critical risk

Example: If your largest client represents $150,000 of your $1M firm, that's 15% concentration—too high for comfort.

Client Grading (A/B/C/D Clients)

Definition: A classification system rating clients based on profitability, ease of service, payment history, and growth potential.

Why It Matters: Not all clients are created equal. Understanding your client mix helps with pricing, resource allocation, and strategic pruning.

Typical Framework:

• A Clients: High-value, pleasant, pay on time, growing
• B Clients: Good value, manageable, reliable
• C Clients: Low-margin or difficult, worth evaluating
• D Clients: Unprofitable or problematic, candidates for termination

Net Promoter Score (NPS)

Definition: A measure of client loyalty based on responses to: "How likely are you to recommend us to others?" (0–10 scale)

Formula:

NPS = % Promoters (9-10) − % Detractors (0-6)

Why It Matters: A leading indicator of referrals, retention, and overall client satisfaction.

Benchmarks:

• Below 0: Critical issues
• 0–30: Average
• 30–50: Good
• 50+: Excellent

Referral Rate

Definition: The percentage of new clients acquired through referrals from existing clients.

Formula:

Referral Rate = (Referred New Clients ÷ Total New Clients) × 100

Why It Matters: High referral rates indicate strong client satisfaction and reduce acquisition costs.

Pipeline Value

Definition: The total potential revenue from all active sales opportunities in your business development pipeline.

Why It Matters: Provides visibility into future revenue and helps with resource planning.

Win Rate

Definition: The percentage of proposals or opportunities that convert to clients.

Formula:

Win Rate = (Won Opportunities ÷ Total Opportunities) × 100

Why It Matters: Measures sales effectiveness and helps refine targeting.

Average Engagement Size

Definition: The average revenue per engagement or project.

Formula:

Average Engagement Size = Total Revenue ÷ Number of Engagements

Why It Matters: Larger engagements typically have better economics and indicate successful upmarket movement.

Recurring Revenue Percentage

Definition: The portion of total revenue that is predictable and recurring (vs. one-time or project-based).

Formula:

Recurring Revenue % = (Recurring Revenue ÷ Total Revenue) × 100

Why It Matters: Recurring revenue is more valuable and makes firms easier to value and sell.

Benchmarks:

• Traditional tax firms: 50%–70%
• Advisory-focused firms: 30%–60%
• CAS-heavy firms: 70%–90%

Advisory Mix (Advisory vs. Compliance Ratio)

Definition: The percentage of revenue from advisory/consulting services versus traditional compliance work (tax prep, audits, bookkeeping).

Formula:

Advisory Mix = (Advisory Revenue ÷ Total Revenue) × 100

Why It Matters: Advisory services typically command higher margins and are less commoditized. Firms with higher advisory mix often command premium valuations.

Part 4: Valuation & M&A Terms

Valuation Multiple

Definition: A factor applied to a financial metric (usually revenue or EBITDA) to estimate firm value.

Common Multiples:

• Revenue multiple: 0.8x–1.5x (varies widely)
• EBITDA multiple: 4x–8x
• SDE multiple: 2x–4x

Why It Matters: Multiples provide a shorthand for comparing firm values, but they're starting points, not final answers.

Multiple of Revenue

Definition: Firm value expressed as a multiple of annual revenue.

Formula:

Value = Annual Revenue × Revenue Multiple

Why It Matters: Simple to calculate but less precise than earnings-based multiples.

Benchmarks:

• Small traditional firms: 0.8x–1.0x
• Well-run firms: 1.0x–1.25x
• Premium firms (high growth, CAS-heavy): 1.25x–1.5x+

Example: A $2M revenue firm at 1.1x multiple = $2.2M valuation.

Multiple of EBITDA

Definition: Firm value expressed as a multiple of EBITDA.

Formula:

Value = EBITDA × EBITDA Multiple

Why It Matters: The most common valuation method for larger firms and PE transactions.

Benchmarks:

• Small firms: 3x–5x
• Mid-sized firms: 5x–7x
• Large, well-run firms: 6x–8x
• PE platform acquisitions: 7x–10x+

Example: A firm with $600,000 EBITDA at 6x multiple = $3.6M valuation.

Seller's Discretionary Earnings (SDE)

Definition: Net profit plus owner's salary, benefits, and discretionary expenses that a new owner wouldn't necessarily incur.

Formula:

SDE = Net Profit + Owner's Compensation + Owner's Benefits + Discretionary Expenses

Why It Matters: SDE represents the total benefit to an owner-operator. It's the standard for valuing smaller, owner-dependent firms.

Example: Net profit of $100,000 + owner salary of $250,000 + owner benefits of $50,000 + personal expenses run through the firm of $20,000 = SDE of $420,000.

Multiple of SDE

Definition: Firm value expressed as a multiple of seller's discretionary earnings.

Formula:

Value = SDE × SDE Multiple

Benchmarks:

• Typical range: 2.0x–4.0x
• Average: 2.5x–3.0x

Example: SDE of $350,000 × 2.75 multiple = $962,500 valuation.

Normalized Earnings

Definition: Earnings adjusted to remove one-time, non-recurring, or owner-specific items to show true ongoing profitability.

Why It Matters: Buyers want to understand sustainable earnings, not artificially inflated or deflated numbers.

Add-Backs

Definition: Expenses added back to profit during valuation because they're discretionary, non-recurring, or wouldn't continue under new ownership.

Common Add-Backs:

• Above-market owner compensation
• Owner's personal expenses (car, travel, meals)
• One-time legal or consulting fees
• Non-recurring equipment purchases
• Family member salaries above market rate

Why It Matters: Proper add-backs can significantly increase calculated SDE and EBITDA.

Pro Forma Adjustments

Definition: Adjustments made to financial statements to show what results would look like under normalized or future conditions.

Why It Matters: Creates an apples-to-apples comparison for buyers evaluating opportunities.

Enterprise Value (EV)

Definition: The total value of a business, including equity value plus debt minus cash.

Formula:

Enterprise Value = Equity Value + Total Debt − Cash

Why It Matters: Represents the full acquisition cost for a buyer who would assume debt and acquire cash.

Fair Market Value (FMV)

Definition: The price at which a business would change hands between a willing buyer and seller, both having reasonable knowledge of relevant facts.

Why It Matters: The legal and conceptual standard for business valuation.

Book Value

Definition: The net asset value of a firm—total assets minus total liabilities as shown on the balance sheet.

Formula:

Book Value = Total Assets − Total Liabilities

Why It Matters: For accounting firms, book value is usually far less than market value because the primary asset (client relationships) isn't on the balance sheet.

Goodwill

Definition: The portion of purchase price exceeding the fair value of identifiable tangible and intangible assets.

Formula:

Goodwill = Purchase Price − Fair Value of Net Assets

Why It Matters: In accounting firm deals, goodwill is typically the majority of the purchase price, representing client relationships and firm reputation.

Intangible Assets

Definition: Non-physical assets that have value, including client relationships, assembled workforce, brand, proprietary processes, and non-compete agreements.

Why It Matters: These are the real assets in an accounting firm—the client book, the team, the reputation.

Client Relationships (Customer Intangible)

Definition: The value attributed to the firm's existing client base, including expected future revenue from those relationships.

Why It Matters: Often the largest identified intangible asset in an accounting firm acquisition.

Revenue Quality

Definition: An assessment of how sustainable, predictable, and transferable a firm's revenue is.

Factors Affecting Quality:

• Recurring vs. one-time revenue
• Client concentration risk
• Client stickiness
• Dependency on specific staff or partners
• Contract lengths and terms

Why It Matters: Higher-quality revenue commands premium multiples.

Transferability

Definition: The likelihood that clients will stay with the firm after a transition to new ownership.

Why It Matters: A firm is only as valuable as the revenue that transfers. Low transferability risk means higher value.

Factors Improving Transferability:

• Deep staff relationships (not just owner)
• Long client tenure
• Sticky services (CAS, payroll, recurring)
• Documented processes
• Willing seller participation in transition

Client Concentration Risk

Definition: The risk that losing one or a few large clients would significantly impact firm revenue.

Why It Matters: High concentration is a red flag for buyers and can reduce valuation multiples.

Earnout

Definition: A portion of the purchase price that's contingent on future performance, usually tied to revenue retention or targets.

Why It Matters: Earnouts bridge valuation gaps and align seller incentives with transition success.

Typical Structure: 20%–40% of deal value over 2–4 years, triggered by retention thresholds (often 85%–90%).

Example: $1M purchase price with 70% ($700K) at close and 30% ($300K) over 3 years based on client retention.

Retention Rate (in M&A Context)

Definition: The percentage of acquired revenue that remains with the firm post-acquisition.

Why It Matters: The ultimate test of deal success. Most deals include retention-based earnouts.

Typical Expectations: 85%–95% retention over 2–3 years.

Due Diligence

Definition: The comprehensive investigation a buyer conducts before acquiring a firm.

Key Areas:

• Financial (revenue trends, profitability, cash flow)
• Client (concentration, retention history, relationships)
• Staff (compensation, contracts, retention risk)
• Operational (systems, processes, technology)
• Legal (contracts, litigation, compliance)

Why It Matters: Due diligence uncovers risks that affect price, terms, or deal viability.

Letter of Intent (LOI)

Definition: A preliminary, often non-binding document outlining the key terms of a proposed acquisition.

What's Typically Included:

• Purchase price range or formula
• Deal structure (asset vs. stock)
• Payment terms
• Due diligence period
• Exclusivity provisions
• Key contingencies

Why It Matters: The LOI sets the framework for negotiations and due diligence.

Asset Purchase vs. Stock Purchase

Definition: Two different deal structures with distinct tax and liability implications.

Asset Purchase: Buyer acquires specific assets and liabilities (most common for smaller deals). Typically favored by buyers for tax advantages.

Stock/Equity Purchase: Buyer acquires ownership interest in the entity, inheriting all assets and liabilities. May be required for certain contracts or licenses.

Why It Matters: Structure significantly impacts tax treatment for both parties.

Working Capital Adjustment

Definition: A post-closing adjustment to the purchase price based on the actual working capital (current assets minus current liabilities) delivered at closing.

Why It Matters: Ensures the buyer receives a business with adequate operating capital, and the seller isn't penalized or rewarded for timing of receivables collection.

Common Approach: Establish a target working capital based on historical averages; adjust price dollar-for-dollar based on variance.

Representations and Warranties (Reps and Warranties)

Definition: Statements made by the seller about the business being sold, upon which the buyer relies.

Common Representations:

• Financial statements are accurate
• No undisclosed liabilities
• Client contracts are valid
• No pending litigation
• Tax returns are accurate

Why It Matters: Provides buyer protection and grounds for post-closing claims if misrepresentations are discovered.

Indemnification

Definition: The seller's obligation to compensate the buyer for losses arising from breaches of representations or undisclosed liabilities.

Why It Matters: Allocates risk between buyer and seller for issues that emerge post-closing.

Escrow

Definition: A portion of the purchase price held by a third party for a period to satisfy potential indemnification claims.

Typical Terms: 10%–20% of purchase price held for 12–24 months.

Non-Compete Agreement

Definition: A contract preventing the seller from competing with the acquired business for a specified period and geographic area.

Typical Terms: 3–5 years, within a reasonable geographic area or targeting the acquired client base.

Why It Matters: Protects the buyer's investment in the client relationships.

Non-Solicitation Agreement

Definition: A contract preventing the seller from soliciting the firm's employees or clients.

Why It Matters: Complements the non-compete by specifically addressing poaching risk.

Transition Period (Consulting Agreement)

Definition: A defined period after closing during which the seller assists with client transitions, introductions, and knowledge transfer.

Typical Structure: 6 months to 2 years, often with declining hours over time.

Why It Matters: Critical for maximizing client retention and deal success.

Roll-Up

Definition: An acquisition strategy where a buyer consolidates multiple smaller firms into a larger entity.

Why It Matters: Roll-ups create scale, improve margins, and build enterprise value beyond what individual firms could achieve.

Platform Acquisition (Platform Firm)

Definition: The initial, typically larger acquisition in a roll-up strategy that serves as the foundation for future add-ons.

Why It Matters: Platform firms often receive higher multiples due to their size and strategic role.

Tuck-In Acquisition (Add-On)

Definition: A smaller acquisition integrated into an existing platform or larger firm.

Why It Matters: Tuck-ins are efficient growth vehicles, often acquired at lower multiples than the platform's implied value.

Merger of Equals

Definition: A combination of two similar-sized firms without a clear buyer/seller dynamic.

Why It Matters: Can be a politically acceptable way to combine practices, but requires careful governance and integration planning.

Private Equity (PE) in Accounting

Definition: Investment firms that acquire accounting practices, typically through roll-up strategies, with the goal of building scale and eventually exiting at a higher valuation.

Why It Matters: PE has transformed the accounting M&A landscape, often paying premium prices for quality firms.

Strategic Buyer

Definition: An acquirer who is already in the accounting industry and seeks synergies from the acquisition.

Why It Matters: Strategic buyers may pay premiums for geographic expansion, service line additions, or staff acquisition.

Financial Buyer

Definition: An acquirer (typically PE) whose primary interest is financial returns rather than operational synergies.

Why It Matters: Financial buyers focus heavily on metrics, growth potential, and management team.

Part 5: Industry Lingo & Common Terms

Book of Business

Definition: The collection of client relationships and associated revenue attributed to a specific person (partner, manager, or firm).

Why It Matters: Understanding "who owns the book" is critical for compensation, succession, and retention discussions.

Eat What You Kill

Definition: A partner compensation model where partners earn based primarily on the business they personally originate and manage.

Why It Matters: Creates strong business development incentives but can hinder collaboration.

Rainmaker

Definition: A partner or employee particularly skilled at originating new business.

Why It Matters: Rainmakers drive growth but can create key-person risk.

Bench Strength

Definition: The depth and quality of talent below partner level, ready to step into senior roles.

Why It Matters: Strong bench strength reduces key-person risk and supports growth.

Key Person Risk (Key Man Risk)

Definition: The risk that the firm's value is overly dependent on one or a few individuals.

Why It Matters: High key-person risk reduces valuations and increases buyer caution.

Practice Management

Definition: The systems, processes, and software used to run the operational side of an accounting firm.

Why It Matters: Good practice management improves efficiency, profitability, and scalability.

Succession Planning

Definition: The process of preparing for ownership and leadership transition, whether internal or via sale.

Why It Matters: Firms that plan early have more options and typically achieve better outcomes.

Partner Buy-In

Definition: The payment made by a new partner to acquire an equity stake in the firm.

Why It Matters: Structures vary widely and signal much about firm culture and expectations.

Partner Capital Account

Definition: The accumulated equity balance each partner has in the firm, typically based on buy-in plus retained earnings.

Why It Matters: Determines payout upon exit and voting/ownership percentages.

Blended Rate

Definition: The weighted average billing rate across all firm personnel.

Formula:

Blended Rate = Total Revenue ÷ Total Billable Hours

Why It Matters: Useful for fixed-fee scoping and profitability analysis.

Rack Rate (Standard Rate)

Definition: The full, undiscounted hourly rate for a particular staff level.

Why It Matters: The baseline for measuring realization.

Fixed Fee (Flat Fee)

Definition: A predetermined price for a defined scope of work, regardless of time incurred.

Why It Matters: Shifts risk to the firm but can be highly profitable with good scoping and efficiency.

Value Pricing

Definition: Pricing based on the value delivered to the client rather than time incurred.

Why It Matters: Can dramatically improve realization and client satisfaction when implemented well.

Scope Creep

Definition: The gradual expansion of work beyond the original engagement scope, often without corresponding fee adjustments.

Why It Matters: A major profit killer. Managing scope is critical for profitability.

Change Order

Definition: A formal document adjusting the scope and/or price of an engagement.

Why It Matters: Proper change order discipline prevents scope creep and preserves margins.

CAS (Client Accounting Services)

Definition: A service model where the firm provides ongoing outsourced accounting functions, including bookkeeping, controller, and CFO services.

Why It Matters: CAS is recurring, sticky, and commands premium valuations. It's a major growth area.

CFO Services (Virtual CFO, Fractional CFO)

Definition: High-level financial strategy and advisory services provided on a part-time or outsourced basis.

Why It Matters: High-value, advisory-oriented service that moves firms up the value chain.

Outsourced Accounting

Definition: Handling a client's entire accounting function externally.

Why It Matters: Growing demand from businesses wanting to focus on core operations.

Advisory Services

Definition: Non-compliance services focused on helping clients make decisions, including business consulting, financial planning, transaction support, and strategic advice.

Why It Matters: Higher margins, stickier relationships, and premium valuations.

Compliance Work

Definition: Required, regulatory-driven services including tax preparation, audits, and statutory filings.

Why It Matters: The foundation of most firms, but increasingly commoditized.

AUM (Assets Under Management)

Definition: The total market value of financial assets managed on behalf of clients (relevant for firms with wealth management practices).

Why It Matters: For firms offering wealth advisory, AUM is a key value driver.

AUA (Assets Under Advisement)

Definition: Assets the firm advises on but doesn't directly manage.

Why It Matters: Shows breadth of client relationship even without direct asset control.

Engagement Letter

Definition: A written agreement between firm and client defining the scope, terms, and fees for services.

Why It Matters: Critical for scope management, liability protection, and professionalism.

Workflow Management

Definition: Systems and processes for tracking work items from assignment through completion.

Why It Matters: Essential for efficiency, deadline management, and capacity planning.

Tax Season (Busy Season)

Definition: The period of highest workload, typically January through April for most firms.

Why It Matters: Capacity planning, staffing, and mental health considerations all center on busy season.

Bandwidth

Definition: Available capacity to take on additional work.

Usage: "We don't have the bandwidth to take that engagement right now."

Offshoring (Offshore Staffing)

Definition: Using staff in other countries (typically lower-cost regions) for accounting work.

Why It Matters: Can dramatically improve margins when implemented well, but raises quality and client concerns.

Nearshoring

Definition: Similar to offshoring, but using staff in closer time zones (e.g., Latin America for U.S. firms).

Why It Matters: Balances cost savings with easier collaboration.

White-Label Services

Definition: Services provided to clients under the firm's brand that are actually delivered by a third party.

Why It Matters: Allows firms to offer services without building in-house capability.

Upmarket (Moving Upmarket)

Definition: Strategy of targeting larger, higher-revenue clients.

Why It Matters: Larger clients typically mean better economics and more advisory opportunities.

Sweet Spot

Definition: The ideal client profile where the firm is most profitable and effective.

Why It Matters: Knowing your sweet spot improves targeting, pricing, and satisfaction.

Quick Reference: Formula Cheat Sheet

Final Thoughts

If you've made it this far, you're serious about understanding the business side of accounting. And that's exactly the mindset that separates struggling firms from thriving ones.

These metrics, KPIs, and terms aren't just vocabulary—they're the language of strategic decision-making. Whether you're trying to improve your firm's efficiency, planning for a future exit, or evaluating an acquisition opportunity, fluency in these concepts gives you a significant advantage.

Here's my challenge to you: Pick three metrics from this glossary that you're not currently tracking and start measuring them this quarter. You can't improve what you don't measure, and you'd be surprised how quickly clarity around these numbers can transform your decision-making.

If you found this guide helpful, share it with a colleague. And if you want to dive deeper on firm growth strategy, efficiency optimization, or preparing your firm for a premium valuation, that's exactly what we focus on at Firmlever.

Let's build something great.

— Marc Howard
Founder, Firmlever

Frequently Asked Questions

What is the most important KPI for accounting firm profitability?

Profit Per Partner (PPP) is often considered the ultimate profitability metric because it shows what partners actually take home. However, EBITDA margin and revenue per employee are leading indicators that drive PPP.

What multiple do accounting firms typically sell for?

Accounting firms typically sell for 0.8x to 1.5x revenue, or 3x to 8x EBITDA, depending on size, growth rate, client concentration, service mix, and other quality factors. Premium firms with strong CAS practices, low concentration, and high growth may command higher multiples.

How is an accounting firm valued?

Accounting firms are valued using multiples of revenue, EBITDA, or seller's discretionary earnings (SDE). The valuation process considers revenue quality, client concentration, staff retention, growth trends, and transferability of the client base.

What is a good realization rate for an accounting firm?

A good realization rate is 92% or higher. Rates below 85% indicate pricing problems, scope creep, or efficiency issues that need attention.

What is a good utilization rate for accounting staff?

For staff accountants, 80-90% utilization is typical. Senior staff should target 70-85%, managers 60-75%, and partners 40-60% (partners have more non-billable responsibilities).

What does SDE mean in accounting firm valuation?

SDE stands for Seller's Discretionary Earnings. It represents the total financial benefit to an owner-operator, calculated as net profit plus owner's compensation, benefits, and discretionary expenses that wouldn't continue under new ownership.

How do you calculate lockup days?

Lockup days equal WIP days plus A/R days. To calculate: WIP Days = (Average WIP Balance ÷ Annual Revenue) × 365, then A/R Days = (Average A/R Balance ÷ Annual Revenue) × 365. Add them together for total lockup.