Buying an accountancy practice is a big undertaking, but one which can help you rapidly grow to be a one million pound practice. If you know that this growth option is the right one for your practice, the next thing you need to be sure of is if you’re paying the right price for it. This article outlines how much you should actually be paying for a practice and the factors that determine its value.
How to work out the value of an accountancy practice
Accountancy practices historically were valued on a 0.8–1.2 multiplier of their Growth Recurring Fees (GRF). There are exceptions to the rule, however, with some selling less than this and others selling more. See later on in this article to see what would influence the multiplier.
When you look at a firm’s figures ask them to take out the following from their revenue, as you are wanting to buy a fee bank:
Software costs they are recharging to their clients
Any introducer fees or commission splits (unless these are set to carry on into the future)
Today, modern cloud-based practices are occasionally valued on a 6–10 multiplier of net profit. (Leverage the cloud to benefit your clients and your firm).
While these ranges are the general rule-of-thumb for calculating the value of a firm, it’s important to be aware that price cannot be separated from the terms and there are factors that can affect this value in the long-term.
Value is not that black and white
While the price you pay is important, even more important, is the value you should expect to receive.
When buying an accountancy practice, it’s essential to know the main factors that will have the greatest effect on value. The examples below will increase the multiplier used with a practice:
- Amount of Clients paying monthly via direct debit or standing order. The higher the percentage, the higher the value of the practice
- Practices which can prove they can run without the firm owner in situ
- Practices with a high gross and net profit margin
- Highly systemised practices
- Practices with a high proportion of revenue from Clients on the cloud and/or advisory services (Read how to become an advisory led practice)
- Practices based in or around London, or urban areas with a large density of accountants, can attract a higher multiplier
- Practices with motivated staff
- Practices with a young and growing Client base
- The availability of the Seller to help with the transition
While this list contains examples of factors that will increase a multiplier, you can reverse them to see why a multiplier may be low.
For example, it is possible to buy a practice for a very low multiplier of GRF such as 0.25. This would only happen if:
- The owner was selling the practice
- There was a high proportion of the Clients selling up or exiting their business
- The owner wanted to get paid 100% upfront and/or didn’t want to be involved in much of a handover.
What you need to remember when buying an accountancy practice
While most practices are valued between 0.8–1.2 times their gross recurring fees, it’s important to know the true value of the firm that you are considering buying.
A low price doesn’t necessarily mean a good deal, so look at the reasons for the low multiplier to ensure that you will get value from this purchase in the long-term.
Positive reasons could be that the owner wants a quick sale and not to be part of the handover or that the portfolio contains a high proportion of clients due to exit their business.
This article was originally published on the Accountants Millionaires' Club Website.