The market has come to its own conclusions around how to value a small accounting practice, says Kev Ryan, transaction advisor for accounting mergers and acquisitions.
“Years ago, it was about cents in the dollar, but now it’s about dollar for dollar,” Ryan says. “Nobody talks cents in the dollar any longer. I haven’t seen anything under one dollar, as a multiple of revenue.”
So, if a small practice earns revenue of $500,000 annually, that amount is what the business is worth at sale.
“Generally speaking, with accounting businesses that have revenues under a million dollars, this is the average accounting industry method of defining value,” he says.
When revenue reaches $1.2 million to $1.5 million, the price trigger moves to a multiple of EBITDA, and sometimes net profit after tax. In this case, valuation becomes more complex. But for the vast majority of smaller practices, the dollar-for-dollar yardstick is applied.
“When it comes to value for smaller businesses, what I believe has kept prices buoyant at that dollar-for-dollar revenue level is the one-time buyer,” Ryan says.
“They’ve got an accounting firm that’s doing $500,000 to $700,000 revenue, and there’s a smaller practice down the road doing maybe $300,000 or $400,000.”
“They’re often willing to pay a good price for that book of business, just to get their revenue north of a million, and they know it will be the one and only deal they will do. They’re willing to pay more than what it might be worth, to get it done.”
A sale requires a perfect match
While the valuation might be relatively simple, selling a business is never easy, Ryan says.
In his role, Ryan uses his experience, knowledge and contacts to create a more seamless process. That mainly involves finding a good fit between buyer and seller.
“We work towards frictionless transactions,” he says. “We use our deep understanding of the market to find a match. We want to ensure our clients only ever meet people that will fit, where the two businesses feel the same.”
What does “fit” mean? Ryan says it’s everything from the technology, systems and processes within the businesses, to their internal cultures, external brand perceptions and ways of working.
“Is it a more formal or traditional method of accounting and tax, or is it a little more dynamic?” Ryan says. “Is the look and feel about wearing a suit and tie every day, or is it about youngsters wearing t-shirts?”
Selling a business can be a “clunky process”, he says. Ensuring a good match helps to remove many potential issues.
Technology and processes are important because buyers are looking for seamless integrations. Culture is important because buyers don’t want their own clients to be frightened off by a different culture, or for the same to happen to the clients of the acquired business.
Does the number of clients matter?
When it comes to the client count, it differs depending on the nature on the business, Ryan says.
“We’re just completing a sale in Sydney at the moment, a business with about a million and a half in revenue and just 12 main clients,” he says. “So, that’s a very high-touch, virtual CFO type of service for which we found a home in a slightly bigger firm, one with revenue of more like $10 million that’s growing out that particular division, its virtual CFO offering.”
“Other businesses are still keen on buying practices with hundreds or thousands of clients, because they can sell other lines, like finance, insurance, home loans, etc.”
The good news for sellers is that Ryan has a strong track record for selling a client’s business.
“There is always someone for someone,” he says.
Although sometimes clients make the sale difficult.
When clients behave badly
What can a business owner do to make the sale process more challenging?
“If the vendor is not ready or realistic, they will kill the deal,” Ryan says.
“The things that make them not realistic are when they want all the money up front with no retention, or they want to remain in control, or they want to micromanage every part of the transition – these are all deal-killing behaviours. So typically, the only way these deals don’t get done is if the vendor makes it too hard for them to be acquired.”
However, there are plenty of ways a business owner can make their business more attractive and saleable.
“Most importantly, they should ensure they’re the owners of the goodwill,” Ryan says. “In some smaller firms, a team member ends up doing the lion’s share of the work and then, from that process, ends up with the lion’s share of the relationships.”
The owner must ensure they, or the brand/business, own the relationships and the goodwill.
It also helps if the owner can implement regular marketing and communication processes to regularly communicate with clients and potential clients rather than simply ringing the accountant when they need to speak to them and never hearing from them otherwise.
“That helps ensure goodwill is transferable,” Ryan says.
Finally, a smooth sale is about system simplicity – using five technology platforms for the business’s various purposes, for example, instead of 20.
“Your basics might be Xero and Xero Practice Manager, a document management and signing platform, good engagement management software like Ignition and, obviously, something to manage relationships with the ATO, etc,” Ryan says.
“And don’t have a caveman mentality about outsourcing or offshoring, because you think your clients won’t like it. Your clients don’t care. They’d much rather a quick turnaround and an affordable price than having to wait for you because you don’t have the capacity.”
