What’s Your Accounting Firm Worth?

All accountants are interested in finding out how much their company is now worth. There is no simple response to that question due to the fact that every company is unique, and the worth of your practice will vary depending on a variety of various aspects.

If you are considering making a sale, the good news is that the current market favours sellers. There are several hundred businesses just in Melbourne alone who are aiming to obtain fees ranging from $150,000 to $5,000,000 in total.

The amount of demand is at an all-time high, but supply is limited as a result of the fact that baby boomer principals and partners continue to “dig in” and work well past the typical retirement age.

These hundreds of dissatisfied buyers are contending with a market that is incredibly difficult.

Let’s assess the real quantity of fees you are selling before we get into all the other aspects that influence the worth of an accounting practice. In essence, you are selling your ‘future maintainable fees’ from your client list.

To get at this crucial number, let’s say that you sent out bills totalling $700,00 in the fiscal year 2020 and that you now need to make an estimate of your “future maintenance fees” for the fiscal year 2020-21. The fees from the previous year make a good place of departure, but you also need to deduct any payments made for the following:

• Clients for whom you conducted business in 2020 but who are no longer associated with the firm because they have moved on, retired or passed away.
• Clients whose situations have become more complicated (i.e. they may have sold their business so their fees will drop).
• Expenditures such as the purchase of shelf companies or the establishment of SMSFs because there are no recurrent annual costs associated with these activities.
• Individual consultancy projects since they are not “maintainable” in the long run (JobKeeper advice)
• The multi-year tax returns that you finished filing the previous year and the maintained fee are simply the fee for one year.

It’s possible that your $700,00 in fees will only translate into $630,000 in future sustainable costs.

On the other side, you can add additional costs for the following items:

• New customers who are participating in your lodgement programme, for whom you are able to provide an estimate of the costs that they will pay the next year
• Customers who are growing may have recently purchased an additional company, established a new branch office, or established a new self-managed super fund (SMSF) in their organisational structure.
• The fee base from the previous year had a minor inflation element applied to it.

It is possible that your ‘future maintenance fees’ will wind up being $670,000 for the 2020/21 fiscal year.

My primary area of concentration is on the valuations of smaller enterprises that have annual fees of one million dollars or less, and in general, these types of businesses are evaluated based on a “cents in the dollar” approach. After taking into account a notional wage for the company’s principals or partners, the valuation approach might be changed such that it is based on a multiple of EBIT (earnings before interest and tax), in the case of larger companies with fees that are greater than one million dollars.

Now, let’s take a look at a few of the elements that contribute to the overall value of an accounting firm.

Fee Amount

Permit me to state right off the bat that the sum of the fees for sale will have some bearing on the total number of prospective purchasers. If you are a vendor in the south-eastern suburbs of Melbourne trying to sell roughly $500k of fees, you would have a queue of purchasers on your doorstep. This is because the sweet spot for most buyers is around the $500k level.

If you were selling $1,000,000 in fees, there would be a significant reduction in the length of the queue. At the $2 million price point, there would be a small pool of potential purchasers.

The laws of supply and demand dictate that prices will increase if there is a greater number of potential purchasers. This typically results in suburban businesses commanding greater costs than those found in regional regions.

Distribution of Fees

There is a considerable relationship between the proportion of total expenditures paid by individuals, corporations, and pension funds, and the overall cost of the service. Your company’s valuation would probably be about half of what it would be for a more traditional accounting firm that primarily serves business clients with a sprinkling of individual returns if it was simply a “I Return Factory” in the mould of an H&R Block branch or an ITP franchise. Individual returns are not the flavour of the month (or the decade), and if your firm was simply a “I Return Factory,” the valuation would probably be about half of what it would be for a more traditional accounting firm. The focus should not be on individuals’ tax returns at the moment (or the decade).

The level of interest shown by customers in the aforementioned return policies is not very high.

Location

The prices are also affected by location. Demand for fees is strong in the eastern states, notably in the inner urban districts of the larger cities. It becomes less prevalent as one moves further away from the central suburbs, and regional towns just do not have the same level of demand for accounting services.

When it comes to the supply and demand relationship, Economics 101 comes into play once more. Having said that, almost any type of accounting practice is likely to find a buyer in this market.

Client Base

In essence, buyers are purchasing a list of customers who are participating in your lodgement service.

If you require help with your bookkeeping, you can give us a call on (03) 8568 3606 or email us on [email protected].

Having a disproportionate amount of your business come from only two or three very large customers is a significant threat to investors. Will this new owner continue to serve these existing customers? Will they take advantage of this opportunity to switch accountants given the recent change in ownership?

The value of the buyer’s investment will drop dramatically overnight if they are unable to retain these customers after the handover.

If the fees don’t reach the level of ‘future maintainable fee,’ you won’t receive the full retention amount 12 or 24 months after the settlement because the contract of sale will probably include a retention clause (such as 10 per cent of the price) to protect the buyer. In this case, you won’t receive the full retention amount.

Buyers certainly desire to reduce the risk, which is why a price cut or a higher retention amount could be applicable to this category of larger customers.

Another incredibly essential component that goes into the valuation of your company is the average age of its consumer base.

Buyers will focus their due diligence on your top twenty or thirty fee-paying clients, and if a large number of those clients are over the age of 55, then there will be concerns that the business could disappear over the next few years. Buyers will also focus their due diligence on your top twenty or thirty fee-paying clients.

Keep in mind that they are acquiring future maintenance fees, and that customers who are entering their twilight or retirement years simply do not draw the same value as those customers who are still working.

You’ll also notice that customers who are in their older years do not refer new firm customers like their peers who are in their 30s do. This is something else that you’ll observe.

They aren’t starting firms or buying investment real estate, but these services have been the primary impetus behind the growth of smaller enterprises for decades.

If more than half of your top 30 clients are over the age of 50, you should start thinking about how to get out of the business as soon as possible and begin drafting an exit strategy. Think about ways to revitalise your consumer base, which is getting older, and it could be time to start looking at digital marketing strategies that are oriented towards attracting younger people.

Staff

Transitioning not only your client connections but also your personnel is required when selling your firm. It is only natural for the team to develop wonderful relationships with the customers, and your personnel has the potential to act as the glue that holds the transaction together.

In general, purchasers don’t want to “rock the boat” in the first few months after the settlement. Instead, they want to keep their productive staff members or place them on a three-month probationary period.

They are also concerned that employees may leave the company and take clients with them, so be prepared for a buyer to question you extensively about your employees before making an offer to purchase your company.

They will focus on each employee’s loyalty and productivity. The company benefits from having staff members of high quality and performance.

Growth

This will have an impact on buyer interest, particularly if your fees are levelling off or falling precipitously. Fee reductions are both a symptom and an early warning indication of more systemic problems.

The writing is on the wall if the practice is losing customers because of an ageing customer base, bad service, or below-average work, and nobody wants to get on board a boat that’s leaking water.

The majority of buyers are looking to expand their business, and an inadequate solution is not going to help them.

The practice of declining is widespread, and in most cases, the vendor removed their foot from the marketing pedal many years ago.

These companies are easily identifiable by their antiquated brand names, websites that function solely as “electronic brochures,” and virtually nonexistent presence on social media platforms. In this day and age, when everything is digital and social, the success or failure of your marketing could make all the difference.

Profitability

Buyers are typically investors who are looking for a return on their investment; therefore, if the profitability of your business is declining, you have a problem on your hands.

While the value of many compliance-based services has declined as a result of technological advancements and automation, the cost of operating a business has continued to climb.

Buyers will compare your company’s performance to that of their own and that of other companies they are considering purchasing.

If the figures don’t add up, they will ask for a price reduction or they will withdraw their interest.

For instance, if the firm only generates $100,000 per full-time employee but is doing $150,000 per full-time employee, this could indicate that the firm’s fees are too “cheap” or that the firm is not productive.

It stands to reason that if a buyer is comparing two practices that charge comparable fees, the buyer will choose to acquire the more profitable business in 99 out of 100 instances.

The following are some tips for boosting your business’s profitability:

• Embrace the technological breakthroughs that have been made in accounting as a method to save both time and money (i.e. create more efficiencies)
• Provide value-added and advisory services, which are services with premium pricing that deliver a larger return on your time investment.
• Include additional services, such as vehicle and equipment financing, audit insurance, mortgages, and financial planning services, in order to maximise the fees and profits generated from each client.

Technology

Because of how much technology has altered the accounting profession, buyers will at the very least anticipate that your company will be virtually paperless and that all of its documents will be kept online.

Even better, customers are drawn to businesses that have already shifted their client bookkeeping operations onto the cloud.

Purchasers don’t want to inherit archive boxes of files and hundreds of filing cabinets, therefore if your offices are furnished with twin screens and current hardware, then you earn a large tick because buyers don’t want to inherit those things.

They are a waste of space, and the file systems they use are antiquated and inefficient. The need for storage contributes to an increase in the monthly rent, which has a negative impact on the company’s profitability.

With regard to the topic of technology, it is also possible for software systems to assist in closing a deal. When migrating client files, you may see a reduction in the amount of time needed to complete the process if you and the buyer utilise the same software (general ledger or SMSF). Your practice’s worth won’t go down as a result, but you’ll become more appealing to potential buyers.

Your Website

Websites are increasingly being recognised as valuable digital assets that can contribute to increasing the value of an accounting business. If the website of your company is nothing more than an electronic brochure that describes the who, what, and where of the company, then it does not provide any genuine value.

These websites are nothing more than billboards in the middle of nowhere, and they do nothing to bring in new customers.

On the other side, websites that reliably produce leads and new business even when they are not actively being visited are extremely valuable.

When it comes to determining the value of an accounting practise, there are a number of additional aspects that come into play; nevertheless, the most important thing to keep in mind is to begin preparing as soon as possible. Now is the time to address all eight of the valuation variables that were discussed earlier in the article if you are thinking about selling your accounting business in the next few years.

7 Motives for Buyers Not to Purchase Your Practice

The Deal Breakers

We all had Economics 101 in college, where we learned about supply and demand, and we are all aware that supply and demand influence pricing in some way. However, in the process of selling your accounting business, other price considerations are taken into consideration; in certain circumstances, prospective purchasers refer to these factors as “deal breakers.”

The demand for accounting services and fees is currently at an all-time high. This has led to an increase in overall prices. Due to the fact that Victoria has more than 250 registered purchasers, there is a frenzy to buy an approach as soon as it is put up for sale. The free market is being stifled because baby boomers are refusing to put their homes on the market for sale.

In some instances, they are selling within the company or going “off-market” and conducting business with friends or coworkers whom they have known for a number of years through their discussion group, the time they spent in university, or with whom they have previously worked at another accounting firm. In other instances, they are selling to other people within the company.

Prices are remaining unchanged as a result of an imbalance between supply and demand; however, I’ve noticed that even consumers with a high appetite are reluctant to make purchases at some companies. This indicates that customers are uncertain about the future of the market. In the following paragraphs, I will discuss some of the reasons why sellers cannot afford to become complacent; this serves as a cautionary note for baby boomers who are planning to sell within the next few years.

This is especially the case when there is a slow increase in the quantity of the supply that is available.

Then, which features of a profession are some of the most likely to discourage potential purchasers from making a purchase?

Age of the Client Base 

Their clientele is increasingly more senior since baby boomers are living far longer than was anticipated. Buyers will often focus the majority of their attention on the top 20 or 30 fee-paying customers of the company. If all of these patients are aged 55 or older, buyers of the clinic may be concerned that as much as forty percent of the business would evaporate within the next few years.

In the event that the top three clients account for a considerable amount of total fees, this concern becomes much more important. The fact that the buyer is dependent on these top customers makes the risk even greater for them, which means that they may wish to negotiate a lower price, a higher retention amount, or an extension of the retention period. In addition to the fact that age is not a factor, the fact that the buyer is dependent on these top customers makes the risk even greater for them.

Declining Fees 

The fact that your expenses are maintaining their current level or perhaps decreasing should raise red flags for prospective customers.

Who in their right mind would pay top dollar for a practise that is seeing a clientele decline and is in decline overall? These kind of companies usually cater to an ageing customer base (as was mentioned before), and the principal of the company is frequently a baby boomer who, in their later years, has developed a certain degree of apathy towards their work.

The medical practise has been in “cruise mode” for a significant amount of time, and as a result, it is typically characterised by the lack of any marketing, website, or financial planning services. In many contexts, the phrase “compliance sweatshop” is the most accurate way to describe what these places are known as.

If I continue to use these terms, you might conclude that I’m being cruel; nevertheless, in the coming years, buyers will move away from companies who use these terms. This is the case since the majority of purchasers have clients in their Gen X and Gen Y demographics as their target market, but these businesses have an extremely small number of clients in those categories. As a direct result of this, customers will avoid doing business with these companies.

Because bookkeeping is rapidly becoming a commodity as a result of the growing popularity of outsourcing, these consumers do not have an interest in paying premium pricing for bookkeeping services. They want to make use of and have faith in computer systems that are located in the cloud, and they want an accountant who does more than just keep the score.

Reduced Profitability 

Let’s face it: buyers are looking for some form of return on the money they invest in a product or service. If your rates remain the same or decrease, but your other costs, such as rent, personnel, and software subscriptions, increase, then your profits will decrease.

The vast majority of sole owners estimate that their annual revenue from their practises falls anywhere between $400,000 and $500,000. The option between two fee pieces that are basically equal except for one of the parcels having a nett profit of $225,000 and the other parcel having a nett profit of $130,000 is a “no brainer,” according to the expression.

Because the current staffing levels are at an all-time low, this aspect is more crucial than it has ever been before. You know you have a magnet on your hands when you have employees that bring in additional fees that are equal to three times their annual compensation. A buyer will grill a vendor on their employees, will want to know everything there is to know about the things the vendor sells, and will want to know whether or not the seller will continue to collaborate with them.

Sometimes the team is the glue that connects the sale and the consumers together, but it is evident that a worker who is 63 years old is not as appealing as a “young gun” who is 28 years old.

Technology

Are you utilising the most recent software and technology that is accessible, in addition to going paperless and utilising dual screens? If a buyer needs to deal with paper, this almost certainly means that they will inherit boxes of files and filing cabinets, which can lead to storage difficulties as well as additional expenses for scanning records. If a buyer needs to deal with paper, this almost certainly means that they will inherit boxes of files and filing cabinets.

My son, who is now in his teenage years, might remark to me, “Get with the programme, dad,” which means something along those lines. Do not put things off and believe that the buyer will have to deal with technological issues when I sell my business in a few years. Instead, do not put things off and believe that the buyer will have to deal with technology issues. Instead, avoid putting things off in the mistaken belief that the buyer would be responsible for addressing technology concerns. This complacency soon leads to some of the difficulties that I discussed before, including a decline in profitability, and it leads to these problems as a result of the problems that I outlined earlier.

Even while there will almost certainly be expenses connected with the acquisition of new technology, doing so can be seen as an investment in the organization’s long-term value. The major goal of technical advancement is to raise production and efficiency, which, in turn, leads to an increase in profit margins. This is accomplished through the creation of new tools and methods.

Price Expectations 

The owners of some of the practises that were discussed earlier in this article predict that they will be able to sell their companies for prices that are higher than the market average when it comes to selling enterprises. The current supply and demand imbalance will keep prices stable for as long as it continues, but eventually, this imbalance won’t be able to continue on indefinitely.

The vast majority of suburban enterprises with annual gross payments of less than $800,000 sell goods and services for an amount ranging from eighty cents to one dollar for each payment dollar received. On the other side, individual I returns do not earn nearly as much, and you should be prepared for a significant reduction in value if individual I returns constitute more than thirty percent of your practise.

Additionally, you are marketing future fees that can be sustained from your client list.

As a consequence of this, you will need to review the gross costs from the previous year, deduct any disbursements and charges for company incorporations, SMSF and trust set-up fees, fees charged for multi-year returns, and deduct fees for clients who have moved on to a different accountant, sold their business, or had one-time consulting engagements.

Bear in mind that you are selling the upkeep costs for one year, which are determined from a list of customers.

You should not believe that the secondhand furniture you already own has any value, as this is not the case. However, the majority of buyers have established businesses that are incorporating your fees into their practise, and these buyers do not want the 18-month-old server that you believe is worth $20,000 in the market. There is a possibility that it could be valuable to a start-up or an internal successor; however, the majority of buyers have established businesses that are incorporating your fees into their practise.

Ebay asserts that the value of the market for old furniture is very low, and all they want is for the data to be transferred to their system.

Take-Home Clients 

Prospective purchasers are likely to be reluctant to work with a vendor who just wishes to take a “few” clients or a portion of self-managed super funds with them when the business is sold. To put it another way, they have retirement plans but also intend to remain active in the tax industry in some capacity after they leave their current position.

You can’t have your cake and eat it too if you proceed in this manner because it provides the wrong idea, and you can’t have it both ways at the same time. You might want to rethink your decision to take on a few members of your family as clients given the fact that they have never paid any fees in the past. You can increase the likelihood that you will receive some kind of reimbursement for the many years during which you performed their work at “mates’ rates” by passing them on as a gesture of goodwill and adding a notional value to the future sustainable costs of the practise. This is one way to guarantee that you will get paid.

It is well knowledge that accountants have a larger propensity for making “comebacks” than John Farnham, and buyers are becoming more keen that they acquire a copy of your tax agent licence before they would do business with you.