It is probably the first question that came to mind when you initially considered selling your firm – what is my practice worth? At Platform Tax and Consulting we are experienced aquirors of small to medium size accounting firms and if there is one thing we have learned it is that no transaction is alike. Variables such as location, size, time of year, transition agreements, who the buyer is, payment terms all play a role in setting the ultimate purchase price. There are, however, some basic multiples that we use and that will be helpful to you when starting the conversation with any buyer.
Most price negotiations anchor around a multiple of revenue. In most markets this multiple ranges from 1–1.1 times revenue; however, in more competitive markets multiples can reach as high as 1.25 times. The reason price is primarily driven by a multiple of revenue is because in most cases there are a number of cost synergies available to the buyer, and thus they are mostly concerned with how much more revenue they are getting in the transaction rather than historical profitability. With that said if the buyer is a similar sized firm or individual looking to get into the business for the first time they will be much more concerned with cash flow, because cash flow will be much more correlated with what they take home at the end of the day.
In most cases cash flow serves more as a “sanity’ check than it does a price setting metric and can vary widely due to the factors mentioned above, but in our experience we see most deals fall between 2-2.5 times free cash flow. The important thing to remember when looking at this metric is that there are a number of expenses that can be reasonably added back to a firm’s normalized profitability to arrive at an adjusted free cash flow number. These add-backs may be more expansive than you think and again will vary with the buyer. The more established the buyer the more cost synergies available to buyer and thus the more add-backs the two parties can agree on.
If you have been through the home buying process you are very familiar with how higher or lower prices of comparable homes can affect the price of your home. It’s the same when buying an accounting practice. If there are a number of practices in your area that have sold for premiums to the metrics above, it is safe to say you can expect the same. Sometimes this data can be hard to find, but talking to professionals in your network, making a courtesy call to a broker in your area and checking out current listings are all great ways to get a pulse on the market.
While there are several more factors to consider before getting to an agreed upon purchase price, the metrics detailed here will be helpful in at least getting in the right ball park as your buyer.