The value of a Practice is the price a buyer is prepared to pay for it. Although you may not be looking to exit the industry for some time, highly valued practices are very profitable and attract clients who not only appreciate the advice that they receive from their Accountant, but are also prepared to pay more for it.
Creating a more valuable practice sooner, means enjoying financial benefits and a better work life balance now and not just when you retire.
1. A Complex Equation
Many Accountants that we talk to still have a concept of their Practice being valued by a top line “cents on the dollar” multiple. If the practice is small (less than $500k in revenue) and in a location where the firm can be easily merged into the acquirer, then a simple, top-line multiple may be offered.
However, in most cases it will not be this simple, and many more factors come into play, that may add or detract from the overall value.
2. Not Just Numbers
Practices are valued based on both financial & non-financial terms. There are numerous non-financial indicators or factors that we often call ‘attractive features’ of a Practice. These are spread across all areas of the business including structure, client base specifics, location, marketing, employees, services, systems & technology & exit plan.
Factors like these have a large impact on the value of a Practice, and naturally, some features appeal to certain individuals more than others – for example, the type of software used by the firm, employee longevity and work/life balance opportunities.
3. Larger Margins
Just like that of most business valuations, the majority of Practices are based on a multiple of the Practice’s bottom line therefore profit margins play a critical role in what Practices are worth. We have seen a number of cases where Accountants get a nasty surprise when an estimate of valuation is closer to 50c on the dollar than 80c on the dollar.
Margins of just 20% on a $700,000 turnover practice are not unusual and do represent a lower value practice. However, a situation like this shows the potential for earning is there, and provides a great opportunity to identify weaknesses and reconfigure the Accounting firm into one that is more efficient and financially rewarding.
4. People Power
Staff are a key component of what makes a valuable practice. As we all know, finding quality staff makes a huge difference to efficiency, delegation and costs. If you have good people, treat them like gold!
Outsourcing is now more common and more accepted amongst Accountants, however, it is important to approach an outsourcing plan with a big picture view to make sure no holes or clients are left by the wayside.
One major challenge when you do look at exiting your Practice is transitioning clients away from your services. Ensuring your staff have developed great relationships with clients will impact on the ability to maintain these clients post-sale. At the end of the day, what buyers are most fearful of is losing the clientbase they have just purchased, often because of the lack of connection they have with them.
Growth and diversification of revenue is a great indicator of the success of an Accounting practice. You want to be both increasing the value of your existing clientbase, often through the introduction of new services, and attracting new clients to the firm.
When we see revenue decline it’s often a result of clients retiring and not being replaced, this raises red flags about how many other clients might retire in the next few years. So, diversity in services and in clients is important.
6. Time & Planning
It takes years for most practices to develop into an A-rated practice or at least a practice that you are happy with. It’s a process of understanding what needs to be done in advance, and implementing changes over time. Accountants are time poor and generally not enough attention goes into adjusting the Practice for the long term benefit of the Practitioner.
The benefits of implementing changes to your practice on an ongoing basis means you will not only increase the value of the Practice for the long term, but also provide you with higher profits in the short term. It will also offer better clients, who value your services, and a happier working environment that you love running every day.
If you’re interested in exploring the value of your Practice, we’d love to talk with you.
We can help you understand where you currently sit in relation to competitors and industry standards, as well as strengths and weaknesses. With our expertise and focus on the Accounting industry, we can provide you with a detailed valuation report and road map of recommendations to get your practice to an A1 rating.
We’d love to book a free consultation call with you, to discuss your personal business goals and challenges and see how we can help.
Get in touch or book your call today.
Steve Toews, Principal