There are several steps to valuing an accounting firm for sale. Accounting practice sales differ from other industries because they sell according to gross revenue instead of profits or cash flows. While this number is an average, it is heavily impacted by profit and cash flow margin functions. Therefore, many prospective buyers see various prices on firms with similar volumes. Of course, the complexity of accounting firm valuation processes is responsible for these vast price ranges. As an accounting firm’s prospective buyer, you should take variables such as cash flow margins, gross revenue, and others to determine the best firm for your specific needs and ROI. Additionally, there are many small business for sale tips entice buyers you should be aware of. In this post, we’ll discuss how to value an accounting firm for sale.
Evaluate Books & Records
First, evaluate the books and records of any prospective accounting firm. Looking at these records often provides deep insight into the business’s management practices and financial health. If evaluating a small business, look for a degree of separation between the seller’s personal and professional expenditures. The best bookkeeping practices also include discretionary earnings calculations and asset/liability breakdowns, as well. Next, look for data visualizations such as charts or graphs to lend the figures context. Surely, determine the financial health of your prospective firm by looking at their books and records.
Determine ROI Time
Second, determine how long it getting a proper ROI from your accounting firm will take. In external sales, there are a few main factors that impact ROI and the time it takes. For example, upfront cash, the time of year, and the seller’s treatment of their accounts receivable drastically impact down payment amounts. For instance, if the seller bills 60% of its revenue by March 1st, and the closing is on March 15th, you might have to operate at a net loss or break-even for a few months. Of course, this reduces down payment amounts. Alternatively, the opposite is also true. If you were to close on December 1st, you would pay a higher down payment. A tax franchise for sale presents another example, as they may not see ROI until the next tax season. Absolutely, evaluate the seller’s fit into your timeframes by determining your ROI time.
Consider Client Base
Third, consider the existing client bases of the seller’s accounting firm. Unless their net worth is extraordinarily high, individual clients have significantly less capital than small- to medium-level enterprise businesses. Examine the seller’s client bases by age, profession, and location. Additionally, search for any opportunities for cross-selling or expansion. This way, you highlight profitable opportunities in these areas that are often overlooked. Moreover, many financial planners value existing clients and their relationships with accountants significantly. In fact, these planners are paying record prices for accounting firms with robust client bases. Certainly, provide deep insights into accounting firm valuation processes by examining the seller’s client base.
Next, review the overall marketplace before committing to an accounting firm. Evaluating the industry like this often reveals trends that significantly impact pricing and valuations. For example, many of today’s accounting firms have less capacity than those before due to staffing shortages. Of course, the need to replace staff and partners delays your ROI and often increases costs. However, there are currently more sellers than buyers, allowing you to be more selective in your evaluations. Additionally, this overabundance of sellers causes firm valuations to trend downward. Definitely, highlight price and value impacting trends by examining the overall marketplace.
Lastly, determining the multiple of revenues on a prospective firm provides the most straightforward visualization of what you expect to pay. There are several factors that determine the multiple. They include the nature of the practice, how large it is, how profitable you think it can be, anticipated competition, and more. There is a direct correlation between this multiple and other important transaction terms. Therefore, you need to compromise with your seller on a set of terms. Focus on variables such as retention period duration, profitability, and payout period duration to affect the multiple. This way, you accurately determine the multiple, which is the most important factor in accounting firm valuations. Of course, accurately evaluate a firm’s multiple of revenues as one of the most crucial factors in valuations.
Valuing an accounting firm for sale can be done in a myriad of ways. For example, start by determining the financial health of your prospective firm by looking at their books and records. Second, evaluate the seller’s fit into your timeframes by determining your ROI time. Third, provide deep insights into accounting firm valuation processes by examining the seller’s client base. Next, highlight price and value impacting trends by examining the overall marketplace. Finally, accurately evaluate a firm’s multiple of revenues as one of the most crucial factors in valuations. Alternatively, you can find a franchise for sale that best fits you and performs most of the hard work. When searching for how to value an accounting firm for sale, consider the steps described above.