What’s your Accounting Firm worth (and how to sell it)?
Article by: Chris Sheedy OF The Hard Word
Many think the biggest challenge in selling an accounting business will be in haggling over the price. But agreeing value, Kev Ryan says, is the easy part.
Rather than wondering whether they’re paying the right amount for an accounting business, says transaction advisor Kev Ryan, buyers are instead focussing deeply on the target company’s “fit”.
“Buyers have to integrate your business into theirs, and they want that integration to be seamless,” Kev says.
“That means the target business has to look and smell like theirs. That’s going to make their job a lot easier.”
“It involves things like the technology that’s being used within the business. But it also goes deeper into the company’s culture, into how the business represents itself to clients, and into what types of clients the practice attracts.”
That’s where a transaction advisor earns their keep, in the matching up of like-minded buyers and sellers. It’s rarely about the money, Kev says. The value of an accounting practice is decided early in the piece using a surprisingly simple method that is commonly agreed across the sector.
The talent of a transaction advisor in the selling of an accounting practice is more often about whether cultures and values are a match, ensuring the buyer’s image doesn’t scare off the seller’s clients.
How do we arrive at a value?
So, how does an accounting practice figure out what it’s worth?
Actually, it’s incredibly simple, Kev says.
“The market has set the value, in terms of smaller practices with revenue below about $1.2 - $1.5 million,” he says.
For those firms it’s a simple dollar-for-dollar calculation – the business’s annual revenue is generally its value, or at least the starting point as the market in recent years has seen smaller firms trading at $1.10 to $1.20. That is, 1.1 to 1.2 times revenue.
So if revenue was $650,000 in the last financial year, that practice’s market value likely starts at $650,000. If its revenue was $400,000, that is probably what it is worth at a minimum.
Of course, there are exceptions to the rule. If annual revenues have varied dramatically over the last few years, the value might instead be arrived at through an averaging process – although the buyer would be very interested in what caused those revenue fluctuations.
And if there are factors leading to a higher demand, of course valuations might change. Such situations might include the fact that the firm comes with great talent, it’s in a geographical area of interest, or there is an attractive or unique mix of clients or an industry niche.
“When a business moves north of the $1.2 million to $1.5 million level of revenue, the price calculation moves to a multiple of EBITDA, or net profit after tax,” Kev says. “Below those levels of revenue, the dollar-for-dollar yardstick is very well accepted.”
If value is that simple, why bring a transaction advisor on board at all? Because they take much of the complexity out of the equation by ensuring a good match with interested, motivated buyers, Kev says.
“One of my goals is to limit the DIY within the industry”, he says. “Peer to peer transactions might work sometimes, but the seller could be missing out on better outcomes if they’d engaged the right advisor.”
How a transaction advisor nails a sale
“None of this is super easy, if you want to do it properly,” Kev says. “When people come to me, my first and foremost job is to find the fit, and to make it as seamless as possible.”
“We pride ourselves on frictionless transactions and sustainable outcomes. That happens when you have the ability to take time to understand the buyer and the seller, and when you also have a deep understanding of the market.”
“If we’re operating on the buyer side, we know what our client needs, what is motivating the purchase, and what they want in terms of culture. If we’re working for a vendor, we know how to navigate the endless buyer pool, to ensure our clients only ever meet people that will fit.”
Typical focus points in terms of fit include the business’s technology stack, and the cultures of the two businesses around whether they are formal or casual, conservative or cutting edge, suits-and-ties or jeans-and-t-shirts, etc.
“How does each business present its work?” Kev says. “Is it a more formal, traditional way of accounting and tax or is it a little more dynamic, offering a broad range of different services?”
“A good transaction advisor, as opposed to a broker who simply advertises vendors via spam emails, will take the time to seek the right information and then to give the right advice. You don’t want a process involving 200, time-wasting enquiries. Nobody enjoys that clunky, ugly experience.”
“A successful sale is not just about the mechanics of running an accounting business, it’s very much about the look and feel.”
With the right information and vendor motivation, what Kev calls “willingness”, it’s actually difficult to not make a sale, Kev says.
“We have never not sold,” he says. “There is always someone who wants to sell and someone who wants to buy a particular accounting business.”
“Of course, everyone wants the right price, but in the end this is never just about price. As long as expectations are managed and vendors haven’t bought into the hype about getting $1.35 or $1.40 to the dollar of revenue, and as long as business owners hold on to the goodwill, rather than allowing a staff member to own all of the relationships, then the sale will happen.”
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