Some buyers prefer a multiple of the gross billings method while others prefer a multiple of net cash flow. These multiples tend to be different but should generally come out to approximately the same price. A general rule of thumb for each method has been around 1 x’s annual gross billings or 2.5 to 3.0 x cash flow. Obviously every practice is different which is why not every practice sells for the same multiple.
Location is also a very important factor when deciphering market value for an accounting practice. Firms located in major metropolitan areas will generally yield a higher multiple than practices in a rural setting. Simple supply and demand is the reason for this. More populated areas mean more potential clients as well as more interested buyers. More interested buyers means a larger buyer pool which can yield to a higher price. Location also is a contributing factor as to where the office is physically located. If the office is close to the buyer or can be moved into the buyer’s current space, this is much more appealing. The buyer is able to cut some duplicated cost and will have a higher perceived value for the practice than a buyer that would have to run this as an additional location. Not all practices and client bases are portable, but practices where the clients are less affected by location can yield a higher price. Ultimately the value of the practice will be dictated on what the buyer is willing to pay for the practice.
Other contributing factors can be owner’s billable rate, average client fees, as well as breakdown of the client services. Some buyers are looking for only tax practices while other buyers may want a more diversified client base with some tax, accounting, payroll and consulting services. We get ask a lot which types of practices are worth more, accounting or tax? This really depends on the buyer and what they are looking for.
There are a plethora of other factors involved when trying to determine market value for an accounting practice, but the above are some of the major points to be considered when determining value.