How Much Is My Accounting Practice Worth?
I have spoken to many Accountants over the last 18 months and have observed a number of key elements that I believe give a good indication as to how much you would sell your Accounting Practice for.
These elements are:
The split of clients between Individuals and SME’s/Businesses/High Wealth Individuals
Quality of your fee base
Who clean is your book?
Longevity of Clients
Currently, in SEQ, the market is saying that it is a Sellers Market. Why? Because there are 10x the amount of buyers looking for a practice to buy than there are Sellers. To give you a brief example of what I mean – I have 43 parties who are looking to purchase an Accounting practice against a hand full of owners who are willing to sell their practice.
Currently the market rate for an accounting practice is somewhere between 0.85c and $1.05 for every Dollar of revenue that the practice earns. I have even heard of a Gold Coast practice asking for $1.20 against every $1 earned. This simply means if the practice was turning over $1M, than it was asking for $1.2M as a sale price. For Qld, this seems to be very rare where as in Sydney and Melbourne, I have heard of practices selling for as high as $1.20 against every $1.
What about a multiplier valuation?? Practice owners are starting to ask for these valuations. A multiplier valuation is typically made on your Net profit. This is starting to creep in with valuations but I am finding Buyers are still valuing practices on the Cents In The Dollar. That said, the larger buyers such as the Top Tier accounting firms value their acquisitions against a multiplier. Bare in mind at all times, your business is only worth what someone is prepared to pay for it!!
The Split of Clients – Generally speaking, the more high-quality clients that you have, the closer to the $1.00 for $1.00 valuation you can ask for your business. Those practices that have too many Individual Tax Returns for Mums and Dads, the lower your valuation as the return potential for these types of clients are low. If you specialise in I-Returns, you can expect a valuation around the 0.80c to 0.85c in the $1.
The more Business Clients with high paying fees that you have on your book, the higher the valuation.
Quality of Your Fee Base – The quality of your fee base has a strong relevance to the valuation of your practice. For example, a practice that has a large percentage of clients with revenues $10M+ will be seen as more valuable than a practice that concentrates on Tradies. The better the client, the better the valuation!
Your Location – Yes Location is important when it comes to valuations!!!! I have spoken to many buyers over the last 18 months and the general consensus is that the further away from the city you are, the lower the valuation. Again, this is a general rule and one that should be seen with shades of grey. I spoke to an accountant in Sydney last year and he valued his own practice at 0.85c in the $1. When asked why, he responded that if his practice was located in North Sydney, he would be asking for over the $1, but he was located in Penrith and he was being realistic on his asking price.
Some buyers see location as a strategic hindrance. For example, the further out of the city you are, the harder it may be to find staff willing to travel for work. Again, this may be right or wrong but perception is reality and in the eyes of a Buyer, this may be their reality.
Staff – Your staff will be taken into account at valuation time. A Buyer will look at the quality of your staff, their experience, how much they are being paid, their charge out rate, qualifications, whether they bring in work for the practice, and the list goes on.
The Valuation will be in your favour if some of your staff go out and win their own work. If you are a large practice and are looking for $1m+ as a sale price, you will be attracting like sized practices as Buyers. Therefore, the Buyer may end up being a principal – just like you – who is the only one in the Practice who goes out and finds work. If that Buyer purchases your Practice, he would now have two businesses that he has to find work for. Now lets say some of your staff wins work for the practice. That would look so much better for a Buyer who has now got less pressure on him or her to feed the many mouths in the Practice.
In addition, I have had issues around the disparity of Charge Out Fees of the Seller and the Buyer. For example, the Buyer may charge out a Senior Accountant for $180 an hour but the Seller charges his or her Senior Accountant out at $120 an hour. This becomes an issue when the new owner (Buyer) starts invoicing clients at an elevated rate.
This holds the same significance regarding your Average Fee. A disparity between the Average fee of a Buyer and Seller is often a deal breaker. Some Sellers that I have spoken to have prided themselves on being the most cost effective operators in town. The issue arises at Sale time when you can’t find a Buyer to justify buying a fee base with such a low average fee. If they move the fee up to be close to parity with their own, they know they will lose clients.
Longevity of Your Clients – The longevity of your clients is important. Remember, all Buyers want a smooth transition once they have purchased your practice. If you have a large portion of your client list that has been with you for only a short time, how loyal will they be once they are hit with the upheaval of the sale of their accountant?? Buyers look for long term clients as there is a degree of confidence that long term clients may forgive their accountant for selling up.
A working example of this is the town of Toowoomba in Qld. The average practice sale in Toowoomba is somewhere around the $1.10 for every $1 earned. The reason for the high valuation is the client base of Toowoomba accountants. There is a lot of agriculture clients in Toowoomba and families who have proven to be loyal to their accountants that, in some instances, run for generations. The power of long term clients has resulted in these high valuations.
As you can see, there are many factors that make up a valuation for Accounting Practices. There are many more that I have not included but these key factors will hopefully give you a firm place to start.
p. 0410548821 e. Steve@TDMango.com.au