What’s Your Accounting Firm Worth?

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    Understanding the value of your accounting firm is crucial whether you’re planning to sell, merge, or simply assess your business’s health. Determining the worth of an accounting practice can be complex, as it depends on various factors unique to each firm. 

    This guide will walk you through the key elements that influence the valuation of your accounting firm.

    Let’s get straight to the point

    The value of your accounting firm depends on several key factors, including future maintainable fees, client demographics, location, fee size, and the quality of your staff. Firms with diverse and growing client bases, modern technology, and efficient operations are more attractive to buyers.

    Location in high-demand areas, such as major cities, also boosts value. Profitability, fee distribution, and a strong online presence further enhance a firm’s worth. Planning and addressing potential weaknesses can help you maximise the value of your firm when it’s time to sell.

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    The Importance of Assessing Future Maintainable Fees

    Before diving into other valuation aspects, understand the concept of “future maintainable fees.” You expect to generate these fees consistently from your current client base. In simpler terms, they represent the ongoing income your firm can reliably maintain in the future.

    For instance, if you billed $700,000 in the 2024 financial year, you’ll need to estimate how much will be sustainable in the next year. This involves adjusting for clients who may leave, those whose needs might decrease, and removing any one-off projects or consultancy fees.

    Calculating Future Maintainable Fees

    Start by deducting the following from last year’s fees:

    • Clients who have left, retired or passed away.
    • Clients whose situations have changed, reducing their need for services.
    • One-time projects or services like JobKeeper advice or SMSF setup.

    Next, add any potential increases:

    • New clients who have joined your lodgement program.
    • Existing clients have expanded their businesses, leading to higher fees.
    • Adjustments for inflation.

    By refining your numbers, you can arrive at a more accurate estimate of your future maintainable fees, which is a critical component of your firm’s valuation.

    Key Factors Affecting Your Firm’s Value

    1. Fee Size and Buyer Demand

    The size of the fees you’re selling directly impacts buyer interest. For example, firms with fees around $500,000 in Melbourne’s south-eastern suburbs often see high demand, leading to competitive pricing.

    However, as the fee size increases to $1 million, the pool of potential buyers tends to shrink, potentially lowering the price.

    2. Fee Distribution: Business vs. Individual Clients

    The type of clients you serve also affects your firm’s value. Firms with a balanced mix of business clients and individual tax returns are generally valued higher than those focused solely on individual returns.

    A firm that primarily processes individual returns, akin to an H&R Block franchise, might see its valuation reduced significantly compared to a firm with a more diverse client base.

    3. Location Matters

    Location plays a significant role in valuation. Firms in the inner suburbs of major cities like Melbourne or Sydney typically command higher prices due to greater demand.

    In contrast, firms in regional areas may face lower demand, impacting their overall value.

    Evaluating the Client Base

    1. The Impact of Client Age

    The age of your top clients is a crucial consideration. Buyers are cautious of firms with an older client base, as these clients may retire or pass away, leading to a revenue loss.

    If any of your top 20 or 30 clients are over 55, this could significantly reduce your firm’s appeal and value.

    2. Client Concentration Risks

    Potential buyers might see this as a risk if a large portion of your revenue comes from just a few clients. The loss of one or two key clients could dramatically impact their investment, leading them to negotiate a lower purchase price or higher retention amount.

    Staff and Transition Considerations

    1. The Role of Your Team

    Your staff plays a vital role in the transition process when selling your firm. Buyers are typically keen to retain experienced and productive team members to ensure continuity of service.

    High staff turnover or the risk of key staff leaving with clients can be a red flag, affecting the final sale price.

    2. Staff Quality and Loyalty

    Buyers will scrutinise the quality and loyalty of your team. High-performing staff members likely to stay post-sale add value to your firm, making it more attractive to potential buyers.

    Growth and Profitability

    1. Fee Growth or Decline

    The growth or decline of your fees over time is a significant indicator of your firm’s health. A declining fee base can signal deeper issues, such as an ageing client base or poor service, making your firm less attractive to buyers.

    On the other hand, consistent growth can enhance your firm’s value.

    2. Profitability and Operational Efficiency

    Profitability is a key consideration for buyers. Firms that generate higher profits per employee are typically valued more highly.

    If your firm’s profitability declines due to rising costs or inefficiencies, you may need to address these issues before selling.

    3. Enhancing Profitability

    To boost profitability, consider:

    • Adopting new technologies to improve efficiency.
    • Offering value-added services like financial planning or audit insurance.
    • Increasing your fees for premium services that provide higher returns on time investment.

    Technology and Digital Presence

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    1. Embracing Modern Technology

    Buyers expect modern accounting firms to be technologically advanced. This means being paperless, using up-to-date software, and having efficient digital processes.

    Firms that are slow to adopt technology may find their value reduced.

    2. The Role of Your Website

    A well-designed, lead-generating website is a valuable asset. If your website acts merely as an electronic brochure, it adds little value.

    However, if it consistently brings in new clients, it can significantly boost your firm’s attractiveness and valuation.

    Final Thoughts on Valuing Your Firm

    When valuing your accounting firm, it’s crucial to consider all these factors and start planning well before you intend to sell. Addressing weaknesses and capitalising on strengths can make your firm more appealing and command a higher price when the time comes to sell.

    By understanding what drives value, you can better position your firm in a competitive market and achieve a successful sale.

    FAQs 

    How Is The Value Of An Accounting Firm Determined?

    The value is typically calculated using factors like annual revenue, profitability, client retention rates, staff expertise, and market conditions.

    What Is The Most Common Valuation Method For Accounting Firms?

    The most common methods include the multiple of revenue method, discounted cash flow (DCF) analysis, and market comparisons with similar firms.

    How Does Client Retention Impact The Value Of An Accounting Firm?

    High client retention rates indicate stable and predictable income, making the firm more attractive and valuable to potential buyers.

    Do Technology And Systems Affect The Valuation Of An Accounting Firm?

    Yes, firms with efficient technology, automation, and scalable systems are valued higher due to their ability to handle growth and reduce operational costs.

    Can The Location Of An Accounting Firm Influence Its Value?

    Absolutely. Firms in areas with high demand for accounting services or specific niches often command higher valuations due to increased market opportunities.

    Brendan Thorp is a Director and Business Advisory Specialist at Bookkept, bringing eight years of dedicated experience in tax and small business advisory. As a Certified Practising Accountant and registered Tax Agent, he specialises in helping businesses optimise their operations through strategic financial solutions and digital transformation. Brendan holds dual qualifications from the University of Newcastle in Commerce and Business, and is known for his ability to translate complex tax regulations into actionable business strategies. When he's not advising clients across various industries from hospitality to healthcare, you'll find him actively engaged in community leadership through local sporting clubs and professional associations.

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    Bookkept offers expert accounting, compliance, and business advisory services to small and medium businesses in Melbourne & Australia-wide, specialising in Xero/MYOB and strategic growth solutions.

    Call: (03) 8568 3606
    Email: info [@] bookkept.com.au

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