Key Factors in Practice Value
Professionals often ask what their accounting or tax practice is worth but asking that question is like asking what houses are worth. It is unwise to rely solely on some simplistic rule of thumb because each practice, like each house, has a number of factors that may cause the price to vary. Following are the seven factors that have the greatest effect on value.
RECURRENCE OF REVENUES
Professional practices generally consist of a stream of clients that must return, at least annually, for another drink at the trough. When there is a perception that major recurring revenues do not exist, the selling price is affected. For instance, a firm that draws significant income from non-recurring items like litigation support might not be worth as much as one composed largely of traditional tax and write-up. And a practice which relies on periodic tax consulting, as opposed to one heavy into on-going tax compliance, will likely be less valuable to prospective buyers.
The size of a practice is important because it impacts the number of potential buyers. In other words, there are many more buyers willing and able to buy a business with $300,000 of annual gross revenues than one bringing in $3,000,000. A larger pool of possible buyers usually results in a better selling price. On the other hand, a very small practice might lose value if the perception exists that it is not large enough to support the buyer.
Location also has a great impact on the potential number of buyers and, consequently, on the value. A firm in a metropolitan area often will sell for more than one located in the country or a smaller city. But even the location within a city is important. A practice whose office is in a popular, growing area of a city might receive 10-20% more than an identical practice a few miles down the freeway. And just as some areas of the country are in higher demand than others so the firms in those areas will command premiums.
Certainly, a more profitable practice will generally sell for more than a less profitable one. Firms with high billing rates and fees are attractive to buyers because that usually translates into a better bottom line. However, cash flow is not the dominating determinant that one might presume it would be. Given that two practices have the same gross revenues, the one with twice the cash flow will not sell for twice the price. Accounting and tax practices are sold on gross revenues.
It is much too simple to say what a business is worth without knowing what terms are involved. For example, one buyer offers $400,000 cash at closing, a second offers a fixed price of $400,000 with $100,000 down and the balance paid with interest over the next two years, while a third buyer agrees to pay generally $400,000 with 20% down and 20% of what is collected each year for four years. On the surface those offers may appear to represent the same value but few people will say those offers are equal! Because there is a variety of terms used today, owners who are willing to consider different options can appeal to a wider market.
VARIOUS NEGATIVE FACTORS
There are a number of miscellaneous situations that negatively impact the 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. Common problems encountered are declining growth, poor or missing accounting records, one or two very large clients, long-term leases, owners who wish to retain clients or to continue working, owners who are perceived as inflexible or employees who appear likely to take clients.
Every buyer in town loves to see FOR SALE BY OWNER as an opportunity to pay cents on the dollar. A good broker provides needed experience in marketing, negotiation, valuation and financing. Most important, perhaps, is that a large, established broker such as Accounting Practice Sales has a much bigger pool of buyers wanting to buy practices. That usually results in better prices, better terms and better buyers.