Accountancy Practice Valuations

With Accountancy Practice Valuations, most accountants generally utilise the easiest and most overused rule of thumb applied to any business. That of the dollar for dollar rule. That means for every dollar of billable income produced, that is the price of the practice. So, if the practice bills $800,000, then the practice is worth $800,000. Notwithstanding that this is a very simplistic and naïve way of valuing anything, with accountancy practice valuations, there are far too many factors to take into consideration. Amongst these factors are:

Clients.

Will all the clients be retained by the new practioner?  What is the age of the clients?

Clients approaching 60 will have a finite billable period. Does the outgoing accountant want to keep a small parcel of fees?

Breakdown of the fees.

Are all the fees recurring revenue? Is there a large percentage of fees that are produced from litigation support? What percentage of fees is from compliance work?

Size of the practice.

Invariably, there are more buyers for smaller parcel of fees, than larger ones. That is a  $250,000 parcel of fees will usually sell quicker than a $2,500,000 parcel of fees.

Location.

Metropolitan fees will often sell more than country fees. Practices located within the popular areas of the metro area will undoubtedly receive a higher price than those in a poorer area.

Terms of the sale.

Is the price of the practice going to paid in full at settlement, with claw back arrangements, or is the sale price going to be spread over a number of periods?

Each and every one of the previous factors will (or should) have a bearing on the final value of an accounting practice valuation. So, even if the sale price started at a dollar  for a dollar, by the time these (and other) factors are considered, the actual sale price may well be 65 cents in the dollar or maybe $1.20 in the dollar.

Rule of thumb methods of valuation are very attractive to owners of accountancy practices that are marginally profitable. To believe that any buyer will front up the money based on such a spurious notion of value beggar’s belief. However, this was very much the process for generations.

Profitability.

Personally, I believe that there should only be one method of valuing any small to medium enterprise. Valuation based on profitability. Income based valuations are what should (and increasingly are) be the method by which accounting practices are valued. Already practices with gross revenue in excess of $1,000,000  invariably resort to a profitability-based valuation method, as it is in their interest to do so.  They are going to receive a far better return utilising a return on investment based on risk and expected returns than on a simplistic rule of thumb. For less profitable practices, they may have to resort to the rule of thumb method, in the hope that the purchasers don’t spend too much time on due diligence.