Small Firm Sales: Setting the Price

Source: Journal of Accountancy

In this article, Joel Sinkin and Terrence Putney discuss factors that drive the value of small firms for purposes of sale. They focus on firms with four or fewer owners, because transactions involving firms of that size are likely to be in the form of a sale rather than a merger. Here's a summary of the primary factors discussed by the authors:

1. Terms of the sale. The multiple of revenues buyers are willing to pay and sellers are wiling to accept is affected by:
   1. Upfront payments
   2. Number of years over which remaining payments will be made
   3. Length of time during which payments are subject to adjustment for retention of acquired clients, and potential size of adjustments
   4. Tax treatment of payments
   5. Potential profitability of acquired practice
   6. Number of potential buyers.
   7. Attributes that affect profitability. There are more firms able and willing to acquire small firms, so the laws of supply and demand dictate that small firms command higher multiples.
   8. Nature of the practice. The type of firm can affect the multiple. For example, litigation support practices often receive lower multiples because their clients are viewed as difficult to transition. Multiples may also be lower for practices with low profit margins. Higher multiples may be available for firms that present synergistic opportunities, such as those with a large number of high-income and high-net-worth individual clients, or those whose client bases offer significant cross-selling opportunities for high-value services.

For the complete article, read “Pricing issues for small firm sales.” 

From Journal of Accountancy, October 2014, www.journalofaccountancy.com/Issues/2014/Oct.