Practitioners often ask…
“What’s my accounting or tax practice worth?”
However, asking that question is like asking what are houses worth? It’s never prudent to rely solely on some simplistic rule of thumb because each practice, like each house, has several factors that will cause the price to vary. The following is a list of seven factors that have the greatest effect on the value of a practice.
RECURRENCE OF REVENUES
Professional practices generally consist of recurring revenue or a stream of clients that return annually for another “drink at the trough.” If this important component even appears to be absent, the selling price is affected negatively. For instance, a firm drawing significant income from non-recurring services like litigation support might not be worth as much as one composed largely of traditional tax and write-up. A practice which relies on periodic tax consulting as opposed to one heavy into on-going tax compliance, will generally be less appealing to prospective buyers.
SIZE
Size directly impacts the number of potential buyers. There are many more buyers willing and able to buy a practice with $300,000 of annual gross revenues than one bringing in $2,000,000. A larger pool of potential buyers results in a better multiple. On the other hand, a very small practice might lose value if it is not large enough to support the buyer.
LOCATION
Location also has a great impact on the potential number of buyers and, consequently, on the value. A firm in a metropolitan area often sells for more than one located in the country or a smaller city. In addition, the location within a city itself is important. Much like real estate, a practice in a popular, growing area of a city might see a 10-20% higher value than an identical practice a few miles down the freeway.
PROFITABILITY
Certainly, the greater the net cash flow, the greater the price. Firms with high billing rates and fees are attractive to buyers since this usually translates into less work for more money. However, historical cash flow is not the dominating determinant that one might presume it would be. In comparing two practices with the same gross revenue, the one with twice the cash flow will not sell for twice the price.
TERMS
Price and terms cannot be separated. For example, one buyer may offer $400,000 cash at closing; a second offer could be comprised of a fixed price of $400,000 with $100,000 down and the balance paid with interest over the next two years; still a third buyer may agree to pay $400,000 with 20% down and 20% of collections each year for four years. On the surface, these offers may appear to represent the same value, but experience has repeatedly demonstrated that they are far from equal.
VARIOUS NEGATIVE FACTORS
There are a number of negative variables which impact price. These include anything that affect the buyer’s perception of how many clients will eventually be retained and how the purchase will benefit the buyer. Among the many possible problems which may be encountered, some common issues are: declining growth, incomplete or missing records, concentration issues (a significant percentage of gross revenue being tied to one or two very large clients), long-term leases, unreasonable transition expectations, or key employees who have not signed a non-solicitation agreement. Additional problems may also arise when only a portion of a practice is being sold or a seller plans to continue working in the office after the close of the sale.
PROFESSIONALLY MARKETED
Every buyer in town loves to see ‘FOR SALE BY OWNER’ and views this as an opportunity to pay pennies on the dollar. A good broker, however, provides essential experience in marketing, negotiation, valuation and financing. More importantly, a specialized broker has access to thousands of buyers immediately. Using a professional almost always results in better prices, better terms, and better buyers.
