Historically, the smaller one or two person accounting practice has been selling at between 60 cents and 80 cents for each dollar of fees generated + assets + work in progress (WIP). Larger firms may attract a higher amount of goodwill, but all multiples used depend greatly on the type of client base, the fees generated by the client base and the location of the business.
Accountancy practices are highly popular because:
- There is a need for their services on a regular basis
- The payment of fees are reasonably regular
- The practice builds up a regular client base
- The client base may have a need for other services
Single operators located in distant country areas will have difficulty in selling their practice. If there is any interest, it will generally be at the lower end of the scale of value. With the advent of more people having advanced internet skills and the faster internet connections coming online between the country and city areas, the larger accounting firms in the city areas are now better able to look after their country clients without having a country based office.
The value of a country practice will depend greatly upon the type and number of clients, the work performed, the fees collected, the reliability of payments and the perceived threat of the internet versus their ability to speak with their country clients ‘in person’ on a more regular basis than a city based practice.
Smaller practices will generally generate fees between $1,000 and $5,000 per client and are a very popular target for other smaller practices to take over in the process of expansion. The most popular selling practice is the medium sized firm where their SME client base pays fees ranging between $10,000 – $25,000+ per annum.
Pricing Methodology
The older proven methodology for estimating the value of a smaller practice has been y using an acceptable level of cents per dollar of fees earned (normally 60-80 cents per dollar of fees earned) + assets + work in progress. Again location and type of clients is a prime consideration.
Some exceptional businesses may even command a premium of above the 80 cents per dollar as the goodwill factor. In general, the quality of the P&E can vary greatly, so P&E is added to the goodwill as a normal Net Asset Value methodology.
For the medium sized practices, the better appraisal methodology is to use an EBIT calculation to ascertain the business net profit (after owner’s or management wages) and to use a capitalisation rate or multiple of the EBIT to ascertain the price.
For the medium size practice, the multiple will be between 2.5 to 4.6 times the EBIT, which is equal to 40% down to 22% capitalisation rate. When using this methodology, the Cap Rate will include the assets.
Work in progress may also be a sizeable consideration in the calculation if there has been a strong growth in the client base for the current year. This should have been taken into consideration when assessing the multiple or percentage used. Work in progress is normally taken by the buyer with most banks willing to lend on the WIP.
Example
Fees received: $1,200,000
Client base: 80% SMEs with fees of $10,000 to $25,000; 10% audits; 10%PAYG
EBIT: $300,000
Location: Major Regional City
Methodology: CAP rate chosen may be as high as a multiple of say 3.2 x the EBIT or approximately 31% Return On Investment
To ensure a good sale, the accounting practice must have all of their books in order and have everything ready for a due diligence inspection. Accountancy practices can sometimes be the same as other businesses, where they give out good information and products, but their internal controls are very weak or non-existent. It is highly important that there is a well balanced client base of individual clients, SME business clients, some audit work and some specialty work.
Cost factors for labour and rent must be at an acceptable percentage level of gross fees received as per a due diligence inspection. The FME of the business should show a net return to a Buyer of around 25% to 35% ROI on total funds invested.
Retention may also be an issue with the normal period being 9-12 months. The seller may have to stay on in a transition role a minimum of 90 days (usually on a paid basis).
The spread and type of client base is most important and should be grouped when listing showing the percentage of income earned from each area.
