Most practicing accountants have heard about one-time gross. This is the average multiple for which accounting firms have sold for many years. One can determine accounting practice valuation by pulling practice comparable sales for the last ten years, and the average will be one time gross. While most industries sell as a function of profit or cash flow, accounting sells according to their gross revenue. This average multiple can be very confusing.
First of all, it’s average. That implies sales will be below the one multiple and above the one multiple. While accounting practice firms sell in a range of multiples, usually between .75 to 1.5 of gross recurring revenue, where they fall in the range is a direct function of profit or cash flow margin. A low-margin firm of 30% will trade close to the bottom of this range, and a high-margin firm of 65% will trade in the upper range.
Therefore, you will see prices on similar volume practices when perusing the listing sites. If you really stop and think about it, a price set on gross would not be a good system unless profit came into the picture somehow. Otherwise, a buyer would pay the same price for a $500,000 firm that makes $100,000 on this revenue or a firm that makes $250,000 on the same revenue. Which one do you want?
While cash flow margin and gross revenue make up two of the key variables, many other variables are taken into consideration when pricing a firm. The remainder of this article will highlight a few other variables that will help your firm sell quickly for a price you can accept.
Table of Contents
Marketing Infrastructure
Many in the accounting field are not great marketers. They are very good at managing numbers but not good at managing sales. For this reason, practices that have a systemic marketing system or some way to regularly grow their book organically generate more interest than a firm that does not. While monetizing this can be difficult, it is possible, and increasing buyer interest means an increased price. The value of the ongoing growth opportunity is looked at very favorably by buying entities and should be discussed in your offering memorandum.
Human Capital
Most firms do not carry excess capacity, so the human capital inside of the firm is significant. Certain firms prioritize this over profitability because changing pricing or realization is easier than finding great internal staff. Most buyers want employees to stay and keep working. It minimizes the change to clients and helps to keep retention high. In addition, non-solicit/non-compete agreements that are in place and transferable are incredibly important. Buyers want these in place before purchase.
Billing Data
Many larger firms will be extremely interested in the billing data. These buyers want to see billing rate and billable hours by employee, realization by the employee, and other internal metrics to see how well-run the firm is. These are indicators of efficiency and, ultimately, profitability. Larger corporate buyers strive to see a 3x or even 4x return on labor. If you have multiple professionals in the house or over $750,000 in gross revenue, buyers will likely ask for this information. Reports are issued every year by size in a report called The Rosenburg Survey. They break down companies by size and report billable hours, bill rates, realization and productivity. This is something concrete to gauge where your practice lies relative to the market and is great to review if you want to make improvements to your practice or if you want to know where you stand competitively before sale. For smaller firms this data is far less relevant, but if you are considering sale you may want to start to track it.
Revenue Mix
Revenue diversification and mix are also essential to buyers. With all of the recent tax law change dialogue, some accountants worried that a chunk of their client base might leave them and start filing on their taxes. For that reason, there was some softness to pricing firms that were primarily 1040 firms last year. Especially the firms with a lot of 1040 business that was not attached to a pass-through entity or another business relationship. These unattached 1040 returns were worth less than a similar 1040 fed by a pass-through. There are buyers of pure 1040 businesses and buyers for more entity-based firms, so the mix itself did not determine demand, but the firms where a larger proportion of the client base were business relationships, were generally valued higher.
Diversification is essential for smaller firms, especially for firms that carry accounting and tax. Smaller firms with accounting and tax relationships were valued higher than pure tax firms. This is likely due to cash flow constraints for small firms. The demand for regular monthly income throughout the year is important to smaller firms.
There are many more nuances and factors to consider when preparing your firm to sell. Berkshire Business Sales and Acquisitions have experience reviewing and negotiating these scenarios. We will help to find the most appealing components of your practice and build a prospectus to share with buyers that will highlight these areas adding additional value possibilities to your practice. Before you step into the sale arena, contact Ryan Gipple at Berkshire Business Sales and Acquisitions to get your complimentary valuation analysis and exit planning steps to best prepare for sale.
