Many sellers wonder: what’s the value of my accounting firm?
Answering that question requires deep insight into your business.
But in general, there are two common methods you can use to get an initial overview. Those are:
- Cents in the dollar
- A multiple of earnings before interest and tax
Both have pros and cons. Let me explain…
Cents in the dollar
This is the more popular rule of thumb.
Here, the buyer (you) will agree to pay a fixed amount for each dollar of gross revenue earn from the financial year.
If the firm has a tiny profit margin, they will usually choose this method.
Earnings before interest and tax
More profitable practices will generally prefer this method due to the fact that it garners a much higher price.
What you should do
No matter which method you pick, you’ll need to take into account several factors in evaluating a firm.
Let’s delve into these below…
- Location
A city-based practice will typically get a higher price than a regional one. This is a result of greater foot traffic and stronger branding prevalence in metropolitan areas.
Real estate is a prime consideration. Where your business operates will indicate its value almost just as much as any other factor on this list.
- Client base
A client base of small and medium-sized businesses is usually valued higher than one of individual clients. Obviously, firms that service individuals with a high net worth (such as wealthy entrepreneurs) are an exception.
But as a rule, practices that deal in high-value niches (such as medical businesses) are often considered profitable enterprises.
As a buyer, it’s important to analyse the client base: how old is the average client? What do they do, where do they work and where do they live?
It’s also worth checking out any cross-selling or expansion opportunities.
- Opportunity
Sometimes a firm isn’t valued by where it’s at, but where it could one day be.
If you can see opportunity in an area yet to be milked for what it’s worth, then it’s possible that the valuation could be much higher than one would first expect.
These days, accounting practices are fetching record prices due to concentrated interest from financial planners with foreign backing.
- Staff culture
As a buyer, you should also look at what sort of culture you’re buying into.
Is there a history of nasty workplace politics that undercut the quality of the services the business is able to provide?
Is there a high quality of staff with relevant qualifications who are reliable and well-versed in the company’s operations? You may like to look at the age, experience, tenure and job description of each staff member. This will give you a clearer view of the type of company you’re dealing with.
(Note: it’s potentially a red flag if many staff members have their own tax agent license. This could indicate that the seller is stying to sell client relationships that you won’t even end up owning.)
- Smoothness of transition
Another way you can value an accounting business is by looking at how easy it is to buy.
How is the sales price determined? What’s the cash upfront going to be, the length of the handover period and the nature of the role of your predecessor?
It could be a good idea to consider a clawback clause, which is essentially an insurance policy in case the business doesn’t meet your expectations.
Final notes
Don’t try and evaluate a tax and accounting business yourself. Seek a professional, and work with the seller and your banker to come to a proper analysis.
The important thing is that as a buyer, you understand just how much a business is worth so that you know what you’re getting yourself into.
After all, a business shouldn’t be a liability. It should be an asset to your name – and if you value it accurately, it likely will be.
