How is an Accountancy Practice Valued?
Ten Percent Financial offers an accountancy practice sale service. Uniquely we charge the sellers no fees (buyers pay us an introduction fee). One of the key questions we get asked by potential sellers is about the value of their practice. We know accountants are used to valuing other businesses, but it can be hard to do the same objectively for yourself.
If you’re thinking of selling – or buying – an accountancy practice, then one of the most important questions you’ll probably have is: how is an accountancy practice valued? You don’t want to sell yourself short by letting your practice go for too little or, equally, end up getting ripped off if you’re in the market to buy. So what determines how much an accountancy practice is worth?
The Short Answer
An accountancy practice is worth anywhere from 50% to 150% of its gross recurring fees (GRF). The most common range is from 80% to 120% with various factors dictating which end of the range a practice falls.
What are Gross Recurring Fees?
Gross recurring fees refer to the income that is expected to be generated in the upcoming financial year. The GRF is estimated by looking at the present year’s income. This is considered a good measure because accountancy clients tend to give practices repeat business.
What Factors Influence an Accountancy Practice’s Value?
While GRF is the basis upon which an accountancy practice’s value is calculated, a variety of factors influence where in the range a specific practice might fall. Some of the most common are:
Reason for Sale
The reason for sale can be a big factor in determining the price of a practice. If personal circumstances mean that selling up quickly is the priority – for example, in the case of death or a sudden illness – then the practice is much more likely to close at the lower end of the range than a firm that is not under time constraints.
Stage of Evolution
The stage the accountancy practice is at also influences its value. A firm that is thriving, on an upward trajectory, and experiencing consistent growth is going to have a higher value than a stagnating practice with a similar GRF.
Location, location, location is not just a watchword for buying property, it extends to accountancy practices too. Where the practice is based can have a huge effect on how much it is worth. Unfortunately, as with so many other things, if you’re in the London area, you’re more likely to be quids in than if your practice is based in a more rural location. On the flip side, however, if you’re looking to buy, the bargains are usually to be found outside of the capital.
Involvement of Existing Staff
Some accountancy practices are sold without the continuing involvement of the partners and/or accountancy staff. Some want to remain part of the organisation after it changes hands. Others are open to either option. Depending on both parties’ starting positions and wishes, this can alter the final price tag of the practice. Having people who are already part of the operation help ease the transition to new ownership can often be a distinct advantage.
Regular Monthly Income
Some accountancy practices, in particular smaller firms, bill their clients on a monthly basis by either standing order or direct debit. Having this type of regular monthly income can increase the practice’s value when it comes time to sell.
The number of regular, repeat clients the practice has can add greatly to its overall value. Diversity of clients is also a positive and may help protect against fluctuations in specific industries. On the other hand, if a practice has recently lost – or is due to lose – a significant number of clients, then this would decrease its value.
Types of Services
Different types of services can also affect the asking price for an accountancy practice. Offering advisory services can add value to a practice, for example, as can a strong emphasis on cloud accounting. The general consensus is that the future is in the cloud, so being on board with modern accounting software and systems is a big plus for any practice these days.
The standing of the firm can increase – or decrease – its value. An established accountancy practice with a good, solid reputation can expect to fetch a price more towards the higher end of the range. Conversely, a firm that is generally less well-respected is likely to command a much lower figure, even if location and GRF are the same.
Final Thought: a Thing is Worth as Much as the Buyer Wants It
While the factors outlined above very commonly influence how much a buyer is willing to pay for an accountancy practice, there could be other unforeseeable considerations that may also swing the deal. If, for example, a buyer is looking for a practice in a very specific location, then they might be willing to pay that bit more than expected for the area. There are no hard and fast rules when it comes to the buying and selling of accountancy practices, so the best thing to do is go into negotiations – whichever side you’re on – with an open mind.
For further information on valuing an accountancy practice please see the sources below: