Accounting Firm Valuation Multiples
Want to learn what valuation multiples apply to your accounting firm? Business appraisers frequently use market multiples to estimate the value of an accounting firm. Understanding these multiples helps firms looking to expand, sell, or gain financing. In this article, we explore common accounting firm valuation multiples and provide insight into key value drivers that may influence the value of your firm.
Keep in mind that many factors affect an accounting firm valuation. For a smooth valuation process, consult a professional appraiser. They will apply the right multiples to determine fair market value.
Peak Business Valuation conducts valuations for accounting firms across the United States. We are happy to answer any questions on valuing an accounting firm and provide accurate accounting firm multiples. Schedule a free consultation with Peak today!
What are Accounting Firm Multiples?
Accounting firm valuation multiples play an important role in valuation. Multiples are ratios based on a financial metric, such as the SDE, EBITDA, or revenue of an accounting firm. They help compare a firm to others within the industry to determine its worth. When using the market approach, a valuation expert determines which multiples to apply. To learn more, check out Valuation Multiples for an Accounting Firm.
Common Accounting Firm Valuation Multiples
In the following sections, we explain the SDE, EBITDA, and revenue multiples. Keep in mind that many factors influence these multiples and their application to an accounting firm valuation. For the most accurate information regarding an accounting firm, it is best to obtain a valuation from a licensed appraiser. Peak Business Valuation is here to help! Schedule a free consultation today.
SDE Multiples for an Accounting Firm
First, SDE multiples value a business according to its seller’s discretionary earnings (SDE). Simply put, this metric reflects the cash flow to the owner. This includes one-time and irregular expenses that are not necessary for regular operations. SDE also accounts for owner compensation, which can drive valuation depending on their level of involvement in the firm.
Formula: Value = SDE × Multiple
Range: SDE multiples for accounting firms typically range from 1.81x – 3.25x SDE.
Accounting Firm EBITDA Multiples
Next, the EBITDA multiple determines value through a firm’s earnings before interest, taxes, depreciation, and amortization (EBITDA). This amount is normalized to account for differences in fixed assets, capital structure, and taxation, thereby allowing for more reliable industry comparisons. EBITDA also represents future earning potential that a buyer could expect.
Formula: Value = EBITDA × Multiple
Range: EBITDA multiples for accounting firms often range from 2.99x – 4.45x EBITDA.
Revenue Multiples for an Accounting Firm
Another valuation multiple used in the market approach is the revenue multiple. This method values an accounting firm through its last 12 months of revenue. Business appraisers tend to favor SDE and EBITDA multiples over revenue because they clearly reflect operating profitability. The appraiser applies multiples that will provide an accurate accounting firm valuation.
Formula: Value = EBITDA × Multiple
Range: Revenue multiples for accounting firms typically range from 0.71x – 1.09x Revenue.
How to Value an Accounting Firm Using Multiples
Multiples can be a helpful tool when valuing accounting firms, but more is often required. For example, the revenue multiple may apply to firms with recurring revenue, like subscription services, while EBITDA values a firm through profitability, not just revenue. This is why an accounting firm valuation often consists of a combination of the market, income, and asset approaches. It allows for a more precise valuation.
Every accounting firm valuation method closely examines financials, key value drivers of the accounting firm, and other relevant factors. A valuation expert at Peak prepares for this and applies appropriate multiples for the valuation. To learn more about accurate accounting firm valuation multiples, schedule a consultation with Peak Business Valuation! See How to Value an Accounting Firm to dive deeper.
Rules of Thumb for Accounting Firms
While rules of thumb and general formulas provide a quick market estimate, the results are unreliable. Various factors go into determining accounting firm multiples. Working with an accredited business appraiser guarantees an accurate and credible accounting firm valuation. Most business transactions also require a certified appraisal to be considered reliable.
Factors Affecting Accounting Firm Multiples
Several key factors shape the value of an accounting firm. Below, we list some of the most common elements a business appraiser considers when valuing an accounting firm. Understanding these factors allows owners to make informed decisions to increase value.
- Client & Service Diversification: Firms with diverse clients and services often have higher valuations. Examples of this include auditing, consulting, and tax preparation. A well-rounded portfolio reduces dependency on any single revenue stream.
- Economic Conditions: A strong economy boosts demand for accounting services. During downturns, demand may shift toward cost-cutting and restructuring services, lowering the valuation.
- Technology & Innovation: Firms that adopt AI and other technological advancements improve efficiency and may increase demand. This often leads to a higher valuation.
- Specialized Services: Strict tax laws and increasing enforcement drive demand for accounting services. Firms specializing in compliance and regulatory consulting may see higher valuation multiples.
- Risk Factors: Firms reliant on a few key partners or principals may face lower valuations. Buyers view this as risky since client relationships and stability may decline if they leave.
Accounting firm multiples typically come from comparable market transactions. However, internal and external conditions result in varying results for each firm. For accurate accounting firm valuation multiples, connect with Peak Business Valuation!
Conclusion
Accounting firm valuation multiples are financial ratios that business appraisers use to value accounting firms. That said, they present limitations, like failing to consider key factors that influence the value of an accounting firm. It takes a trained eye to identify appropriate multiples and account for market trends.
Peak Business Valuation frequently values accounting firms. We are happy to help you navigate the valuation process. Schedule a free consultation today! Be sure to check out Accounting Firm Valuations and Valuing an Accounting Firm to learn more.
