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Source: Insight the Magazine of the Illinois CPA Society
The value of an accounting practice depends on many variables. Here are some that apply to the value of firms with annual revenues below $1 million.
- Client retention — The longer the time period during which the purchase price will be reduced by loss of clients, the higher the price. The length of this period will be affected by the frequency of client visits. If the CPA sees clients only once a year, the buyer has less opportunity to cultivate client relationships and needs more time.
- Profitability — It is the profit the buyer expects to make, not what the seller has earned, that is most important. If one practice is more profitable than another because the former operates it from home and has lower overhead, it isn’t necessarily more valuable to a buyer.
- Value can be affected by tax issues — If the payment period is five years, but the tax amortization period is 15 years, the value may be less than if the amortization period were closer to the payment period.
- Client base — Growing clients who refer new business are more valuable to a buyer than older clients on the verge of an exit event.
- Client base — There may be an opportunity for the buyer to offer services not previously offered by the seller.
- Cash and payout — The higher the cash payment (or the shorter the payout period), the lower the value. Generally the payout period is three to seven years.
- Furniture and equipment — these are not valuable to the buyer who doesn’t need them.
The value of an accounting firm is generally a multiple of revenues. The multiple is a function of the above variables.
Practices over $1 million in revenue generally sell at lower multiples and longer payout periods. This is because smaller firms can often be easily assimilated with little marginal cost.
Larger practices are often acquired to enhance the buyer’s staff capabilities. Other variables include the opportunity to provide a new service niche to the existing clients of the acquired firm, and the opportunity to increase market share or establish a presence in a new geographic market.
From Insight, The Magazine of the Illinois CPA Society, August 2005. For the complete article, click on the following link:
http://www.insight-mag.com/insight/05/08/col-4-pt-1-AcquiringMinds.asp. |
