SETTING A VALUE FOR ACCOUNTING PRACTICES
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Many accountants will have a basic idea of what their practice is worth, or they may think they do.
Most of them will use the easiest and most common valuation method which is applied to many and varied businesses across a wide range of industries.
That is the dollar for dollar concept. What does this mean?
It is quite simple – Every dollar of billable income produced, represents one dollar in value.
So if the practice bills out $500,000, then in theory that practice is worth $500,000 in the market.
As I said this is quite simple, and in fact is too simplistic and basic way of valuing any business. In particular with accounting practices there are many more factors that need to be considered to arrive at a realistic and marketable valuation for the practice.
Questions to be asked:
- Will all clients be taken over by the new owner?
- What are the age demographics of the client base?
- What are the demographics of the client base:
- Private individuals
- Self managed funds
Individual clients with less than 10 years to retirement age will have a limited billable period.
The seller may want to retain a small portion of his private clients.
Questions to be asked:
- Are all fees recurring revenue?
- Is there a portion of one off revenue streams?
- Where does new business come from?
- How many new clients have they onboarded in the last 12 months
- Are there number of clients that make up a significant portion of the revenue stream?
- Is there large percentage of fees generated from legal support?
- What percentage of the fees are generated from compliance work?
SIZE OF PRACTICE
The size of the practice will have a significant impact on the time it takes to sell an accounting practice.
There will be more buyers who can complete a purchase for a smaller income stream than one for practices that generate over $1m in revenue streams. The small practices will generally sell quicker due to more people looking in the lower bracket.
Capital city locations and desirable coastal locations with generally sell at a higher price than rural areas.
In the capitals and the coastal areas there will be spots that sell at a higher price than areas that are viewed as lower socio economic areas.
TERMS OF SALE
How will the settlement occur:
- Full price paid at settlement
- Claw back arrangement
- Installment payments
All of the above factors will have a direct impact on the selling price of the practice.
So if we started with a valuation of one dollar for every dollar of revenue income, taking into account all of the above factors the actual sale price could vary by 30% either way.
There is one tried and test method for valuing any SME and that is on the profitability that the business generates.
Valuations based on profitability are what should be used to value accounting practices.
It is already generally accepted that practices with a gross revenue of in excess of $1m are valued on the profitability based method.
This methodology will started to be used for smaller parcels of fees on a more regular basis.
Buyers in the current market are looking for return on investment, so it critically important that we start valuing accounting practices with this in mind and that leads to the profitability based model
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