Valuation Methods Accounting Practice is based on different criteria depending on the practitioners’ metrics on value and factors that play a huge role long term for both the buyer and the seller.
1. Why do firms sell their practices?
- Retirement: Many of them decide to finish their career and cash out from the business.
- Unwilling to sign a new lease for the office space, commercial real estate could be expensive and a pivotal reason to sell off for non-profitable firms.
- Change of personal location: The firm owner simply decides to move out.
- Lifestyle changes, relating to but not limited to depression, change of passions or health problems.
These factors are very important to consider when determining the sale price of the practise, as the price you set for your practice when establishing a long term plan tends to be higher than the price you set when all the stakeholders are aware of your reasons to sell off. (Livingstone, 2009)
2. How much is one paid for an Accounting Firm?
- The general rule of thumb of how much one is paid for an accounting practice is in the range of 80 cents – 120 cents on the dollar, or 80% – 120% of volume.
- There are times where it is 100 cents on the dollar ($100,000 of volume would sell for $100,000). Ultimately, this blog will show that not all firms with $100,000 are worth the same amount.
3. What the buyers need to know when negotiating the sales price?
Evaluate the jobs.
- Audits, reviews & compilations: Audits tend to be valued more than reviews while reviews are valued higher than compilations. A compilation refers to a “company’s financial statements that have been prepared by an outside accountant” (AccountingCoach). Both audits and reviews need revelation under the GAAP require more expertise and hence create higher fees, while the learning curve for IFRS may be an incentive to retire/sell early. (Livingstone, 2009)
- Demand: Specialists will likely amass demand for work based on the skill of the vendor. The buyer may recognize that they can cover more ground with the vendor’s client base than what the vendor has done.
- Research client diversity: The next step would be to look at the client base to find the basis of the clients. A list of client mixes that add real value to a firm are financially sound clients, growth industry accounts and a predominantly diversified base.
Evaluate the staff.
According to Mackay LLP, 90% of your goodwill goes down the drain every night. These are some important questions to ask.
- How skilled are your employees with respect to current practises?
- How well are the staff trained and what training methods are implemented?
- Is the staff satisfied and happy? Are they paid well to their standards?
Research the firm’s management strategies.
A healthy income statement and balance sheet of the firm will depend on the charge out rates, the billable hours worked per staff member, “what billing variances exist and its bad debt experience and significantly contribute to the valuation.” (Livingstone, 2009)
Some notable factors to bear in mind would be to review the lease for commercial real estate, equipment, asking for a Peer Review from the selected vendors, and reviewing important files and income tax returns.