How to Value a Bookkeeping Business
Bookkeeping businesses provide essential financial services to various entities such as businesses, governments, healthcare providers, and individuals. This can include financial record keeping, account management, payroll processing, etc… As such, the bookkeeping industry plays a crucial role in the economy and has retained steady demand for years. In recent years, the industry generated over $66 billion dollars in revenue. In addition, the industry has steady profit margins. This is ideal for those looking to buy, expand, or sell a bookkeeping business. However, operating a bookkeeping business can be difficult. To build a successful bookkeeping business, it is beneficial to understand how to value a bookkeeping business.
To learn how to value a bookkeeping business, receive a business valuation. Receiving a business valuation can help you understand the strengths and weaknesses of your bookkeeping business. With this information, you can take the next steps to increase the value of a bookkeeping business you are looking to buy or sell.
Peak Business Valuation, business appraiser, works with bookkeeping businesses on a regular basis. We are happy to provide you with a business valuation for a bookkeeping business. We can also discuss any questions you may have about how to value a bookkeeping business. Schedule a free consultation today to learn more about valuing a bookkeeping business!
How to Value a Bookkeeping Business
There are various methods to value a bookkeeping business. Two popular methods are the market approach and/or the income approach. The method a business appraiser uses depends on various factors. This can include the type of business, the business transaction, and the reason for the business valuation. At Peak, our appraisers receive extensive training on determining the best valuation approach(es) for your bookkeeping business. This may involve using a combination of valuation approaches.
Valuing a Bookkeeping Business Using the Market Approach
The market approach is popular when valuing a bookkeeping business. The market approach is similar to the approach that a real estate appraiser takes when valuing a house. Real estate appraisers compare the house to similar properties that have recently sold in the area. This helps them determine an accurate value of the property. When using the market approach to value a bookkeeping business, a valuation expert looks at similar businesses that recently sold. If the business is private, they refer to private transaction databases to gather information.
Multiples for a Bookkeeping Business
The market approach uses valuation multiples to determine the value of a bookkeeping business. Valuation multiples are financial ratios that compare a business’s value to a financial metric such as earnings, cash flow, or sales. To find the valuation multiples for a bookkeeping business, valuation experts apply the proper NAICS or SIC code. We discuss valuation multiples for bookkeeping businesses below.
SDE (Seller’s Discretionary Earnings) Multiples for a Bookkeeping Business
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- The SDE multiple measures a bookkeeping business’s cash flow by multiplying its SDE by the multiple. This helps the valuation expert determine the fair market value of a bookkeeping business.
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EBITDA Multiples for Bookkeeping Businesses
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- The EBITDA multiple measures a bookkeeping business’s return on investment (ROI).
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REVENUE or SALES Multiples for a Bookkeeping Business
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- When using the revenue or sales multiple, business appraisers apply a multiple to the bookkeeping business’s total sales to determine its value.
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To understand more about how to value a bookkeeping business, read Valuation Multiples for a Bookkeeping Business.
Valuing a Bookkeeping Business Using the Income Approach
The income approach is also common when determining the value of a bookkeeping business. With the income approach, business appraisers rely on the future cash flow potential of a bookkeeping business to determine its value. In addition, the income approach assesses the risks associated with buying or selling a bookkeeping business. Below, we discuss a few common risks of a bookkeeping business.
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- Technology: Bookkeeping businesses can use technology to enhance operational efficiency. As such, bookkeeping businesses need to be aware of technological advancements to keep up with competition.
- Regulatory Compliance: Taxes and employment regulations are subject to frequent change. It is vital for bookkeeping businesses to be aware and compliant with regulations.
- Staff: Bookkeeping businesses should hire individuals who are skilled and experienced with industry services. This can help attract more clients and build the reputation of a bookkeeping business.
- Competition: The bookkeeping industry is very competitive. To succeed, operators need to find ways to differentiate from competitors.
Methods to Value a Bookkeeping Business Using the Income Approach
There are several ways to use the income approach to value a bookkeeping business. The two most common methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods measure the value of a bookkeeping business by considering its future cash flow potential. Below, we discuss how to value a bookkeeping business using the capitalization of cash flow method and the discounted cash flow method.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is best for bookkeeping businesses with long and stable histories. This method involves determining an appropriate measure of economic income for a specific period. The income is then divided by a capitalization rate. The capitalization rate reflects an appropriate rate of return an investor can expect from a bookkeeping business. Additionally, the capitalization of cash flow method considers the risks associated with a bookkeeping business.
Discounted Cash Flow Method
- Typically, business appraisers use the discounted cash flow method for bookkeeping businesses with a strong financial history. This method also benefits bookkeeping businesses with reliable forecasts. When using the discounted cash flow method, business appraisers rely on 3-5 years of cash flow projections. These earnings are then divided by a discount rate to present value rather than a capitalization rate. This method is less common since it uses future cash flow estimates which can be volatile.
Summary
There are various methods a business appraiser may use when valuing a bookkeeping business. Generally, business appraisers at Peak Business Valuation rely on the market approach and/or the income approach. These valuation approaches help business appraisers accurately determine the value of a bookkeeping business. Each approach serves a different purpose. To know which method is best for your bookkeeping business, receive a business valuation. During a business valuation, you will also learn about the risks and opportunities associated with a bookkeeping business. This is beneficial whether you are buying, expanding, or selling a bookkeeping business.
Peak Business Valuation, business appraiser, is here to help! We work with various bookkeeping businesses across the country. With Peak, you can receive a business valuation for a bookkeeping business. We also welcome any questions on how to value a bookkeeping business. Start now by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Bookkeeping Firm, Value Drivers for a Bookkeeping Firm, and Valuation Multiples for a Bookkeeping Firm.
