How to Value an Accounting Firm
The accounting industry helps businesses, individuals, and various entities with financial management, record-keeping, and reporting. According to IBIS World, the accounting industry generates over $28 billion dollars per year. In addition, the industry has healthy and steady profit margins. As such, there is a steady demand for accounting firms. If you are looking to buy, grow, or sell an accounting firm, it may be a good time to do so. However, there are many challenges that may prevent success in the accounting industry. To succeed it is important to identify ways to overcome these challenges. You can start by learning how to value an accounting firm.
Receiving a business valuation is an effective way to learn how to value an accounting firm. As part of a business valuation, a business appraiser identifies the strengths and weaknesses of your accounting firm. In addition, they will help you understand how to increase the value of an accounting firm. This is important whether you are buying, expanding, or selling an accounting firm.
Peak Business Valuation is a professional business appraiser. We work with many accounting firms throughout the country. Peak can provide you with a business valuation for an accounting firm. If you have any questions on how to value an accounting firm, reach out to Peak! Start now by scheduling a free consultation below!
How to Value an Accounting Firm
There are several valuation approaches a business appraiser may use to value an accounting firm. At Peak Business Valuation, our valuation experts often rely on the market approach and/or the income approach. Each method provides a different perspective on the value of an accounting firm. When valuing an accounting firm, a business appraiser determines the best valuation approach for your firm. This can include using a combination of valuation methods to value an accounting firm.
Valuing an Accounting Firm Using the Market Approach
The market approach is a popular method to determine the value of an accounting firm. This method is similar to the real estate appraisal process. When valuing a home, real estate appraisers look at similar properties that were recently sold in the same area. This helps them understand an accurate value of the property. When valuing an accounting firm under the market approach, an appraiser compares similar firms that recently sold on the market. If the firm is a private entity, the business appraiser gathers information from private transaction databases.
Multiples for an Accounting Firm
Valuation multiples are a key component of the market approach. A valuation multiple is a financial ratio that compares an accounting firm’s value to a financial metric. To find the proper multiples for an accounting firm, a business appraiser uses the proper NAICS or SIC code. In the following paragraph, we discuss how to value an accounting firm using valuation multiples for an accounting firm.
SDE (Seller’s Discretionary Earnings) Multiples for an Accounting Firm
- The SDE multiple is a common metric when valuing an accounting firm. This multiple measures the value of an accounting firm by comparing its value to its seller’s discretionary earnings.
EBITDA Multiples for an Accounting Firm
- The EBITDA multiple determines the return on investment (ROI) an operator can expect from an accounting firm.
REVENUE or SALES Multiples for an Accounting Firm
- REVENUE multiples calculate the value of an accounting firm by assessing its total sales. This multiple is less common, however, business appraisers determine which method is best during the valuation process.
Valuing an Accounting Firm Using the Income Approach
The income approach is another standard method to value an accounting firm. This valuation approach assesses value based on an accounting firm’s cash flow potential. Additionally, the income approach considers the risks an investor may encounter before meeting expected earnings. We highlight a few of these risks below.
- Competition: Competition in the accounting industry is intense and increasing. To succeed in this industry, find ways to differentiate your accounting firm from competitors.
- Key Personnel: Accounting firms provide important financial services for businesses and individuals. As such, it is important to hire individuals who are skilled and experienced in accounting.
- Client Relationships: It is vital for accounting firms to build strong client relationships. This promotes steady cash flow and profitability.
- Quality Control: Accounting services are crucial for many businesses and individuals. Failure to provide high-quality accounting services can be detrimental to these entities.
Methods to Value an Accounting Firm Using the Income Approach
There are multiple variations of the income approach for determining how to value an accounting firm. Two common methods are the capitalization of cash flow method and the discounted cash flow method. Both of these methods assess the future earning potential of an accounting firm. We discuss these valuation methods in the following paragraphs.
Capitalization of Cash Flow Method
- Peak Business Valuation often uses the capitalization of cash flow method when valuing an accounting firm. The capitalization of cash flow method is best for accounting firms with stable histories. When using this method, the valuation analyst determines an appropriate amount of economic income for one period of time. This period is then divided by a capitalization rate. The capitalization rate represents a rate of return that an investor can expect. Additionally, this method assesses any risks that the buyer may encounter. We discuss some of these risks above.
Discounted Cash Flow Method
- The discounted cash flow method uses 3-5 years of projections to determine the value of future earnings. The valuation expert then discounts the future earnings using a discount rate rather than a capitalization rate. This method is most suitable for accounting firms with strong financial histories. It is also ideal for accounting firms with reliable forecasts. Keep in mind, the discounted cash flow method is less reliable since it is limited to future cash flow estimates which can be inaccurate.
There are various valuation methods for valuing an accounting firm. Each method offers a different assessment of an accounting firm’s value. To know which method is most applicable to your accounting firm, receive a business valuation. Receiving a business valuation is also a great way to learn about the risks and advantages of your accounting firm. This information is beneficial whether you are looking to buy, grow, or sell an accounting firm.
Peak Business Valuation, business appraiser, is happy to help! We value accounting firms on a regular basis. Peak Business Valuation can provide you with a business valuation for an accounting firm. We can also answer any questions you have about how to value an accounting firm. Start now by scheduling a free consultation with Peak below!
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