Valuation Multiples for a Tax Preparation Business
The tax preparation industry includes businesses that provide tax return preparation services to individuals and businesses. This typically involves helping clients maximize savings on taxes and refunds. According to IBIS World’s data, there are over 129,000 tax preparation businesses in the United States. Due to complex tax regulations and growing disposable income, demand for this industry remains high. As such, we can expect the tax preparation industry to generate over $15 billion dollars. If you are looking to buy, grow, or sell a tax preparation business, it is vital to understand the valuation multiples for a tax preparation business. As a business appraiser is valuing a tax preparation business, they often use multiples.
Valuing a Tax Preparation Business
Whether you are buying or selling a tax preparation business, it is best to learn how to value a tax preparation business. The first step is to receive a business appraisal for a tax preparation business. If you are buying a tax preparation business, an appraisal can help you determine a fair purchase price. The appraiser may also discuss effective negotiation strategies. If you are selling a tax preparation business, receiving a business appraisal can help you understand a fair listing price. Additionally, you will learn how to increase the value of a tax preparation business.
There are various methods that valuation experts use to value tax preparation businesses. In many cases, they will use the market approach. This valuation approach uses valuation multiples. In this article, we give an overview of valuation multiples for a tax preparer.
However, this article is only a guide. To learn what valuation multiples are applicable to your tax preparation business, receive a business appraisal. Peak Business Valuation, business appraiser, is happy to provide you with a business appraisal! We work with may tax preparation businesses across the nation. If you have any questions about valuing a tax preparation business and applicable multiples for a tax preparation business you are buying or selling, reach out to Peak! Start now by scheduling a free consultation.
Valuation Multiples for a Tax Preparation Business
The following image displays average market multiples for a tax preparation business. When valuing a tax preparation business, the valuation expert often uses multiples. However, the multiples below are only averages and may not apply to your tax preparation business. For more accurate multiples, obtain a business appraisal. Peak Business Valuation is here to help! The first step is to schedule a free consultation with Peak.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Valuation multiples are similar to ratios since they compare two factors. When using multiples, the business appraiser compares a tax preparation business’s value to a financial metric. These metrics can include earnings, cash flow, or sales revenue. For example, the SDE multiple is common to uses in a business appraisal for a tax preparation business. The SDE multiple compares the seller’s discretionary earnings of the tax preparation business to the implied value of the tax preparation business. The expert assesses the multiples of other tax preparation businesses that recently sold. Then, they can determine multiples that are applicable to your tax preparation business and can get a range of values.
For example, suppose the seller’s discretionary earnings of a tax preparation business are $150,000. If the appraiser uses a 2.32x SDE multiple, the implied value of a tax preparation business is $348,000 ($150,000 times 2.32x). On the other hand, if the appraiser uses a 3.12x multiple, the implied value of the tax preparation business is $468,000. ($150,000 times 3.12x)
Peak Business Valuation, business appraiser, works with many entrepreneurs who are buying or selling a tax preparation business. In the following paragraphs, we detail the average valuation multiples for a tax preparation business. These are what tax preparation businesses typically transact at or are valued at. Keep in mind, the range of value may vary since each tax preparation business is unique. The following sections highlight SDE, EBITDA, and REV multiples for tax preparation businesses. To learn more about valuation multiples for a tax preparer, schedule a free consultation with Peak!
SDE Multiples for a Tax Preparation Business
Average SDE Multiple range: 2.36x – 3.17x
Based on our data, tax preparation businesses transact between a 2.36x – 3.17x SDE multiple. To determine an implied value of a tax preparation business, apply the multiple to the seller’s discretionary earnings. Refer to the following equation.
SDE X Multiple = Value of the Business
For instance, a tax preparation business generates $268,000 in seller’s discretionary earnings and transacts at a 2.80x multiple. In this case, the business value is approximately $750,400.
$268,000 X 2.80x = $750,400
When valuing a tax preparation business, a business appraiser often uses an SDE multiple. This is because SDE adds back common financial metrics in the business valuation. This may include a fair owner’s salary, any non-recurring or non-related business expenses, and any personal expenses.
EBITDA Multiples for Tax Preparers
Average EBITDA Multiple range: 3.42x – 4.51x
The average EBITDA multiples for tax preparation businesses range between 3.42x – 4.51x. Apply this multiple to EBITDA to determine an implied value of the business. See the calculation below.
EBITDA X Multiple = Value of the Business
For example, a tax preparation business has an EBITDA of $200,000. It transacts at an EBITDA multiple of 4.04x. Using the above metrics, the tax preparation business is worth approximately $808,600.
$200,000 X 4.04x = $808,600
Using the EBITDA multiple helps calculate the return on investment (ROI) that the owner expects to make from the tax preparation business. This multiple may be preferred since it includes normalized ratios. Normalized ratios allow the appraiser to compare your business to similar tax preparation businesses. This is because it normalizes differences in capital structure, fixed assets, and taxation. In addition, using these ratios can more accurately determine the future earnings a buyer can expect.
REV Multiples for a Tax Preparation Business
Average REV Multiple range: 0.99x – 1.15x
According to our data, tax preparation businesses transact at an average revenue multiple of 0.99x – 1.15x. The appraiser will multiply the most recent 12-months of revenue a tax preparation business makes by the multiple to derive an implied value. Refer to the following equation.
Revenue X Multiple = Value of the Business
For example, a tax preparation business makes $850,000 in revenue. It then transacts at a 1.03x multiple. In this case, the business is worth approximately $988,000.
$850,000 X 1.03x = $875,500
The REV multiple represents the total amount of sales revenue generated by the tax preparation business. During a business valuation for a tax preparation business, experts assess multiples of similar tax preparation businesses that have sold on the market. Typically, small businesses transact on cash flow multiples – SDE and EBITDA. This is because cash flow multiples consider expenses such as salaries, rent, and COGS.
Summary
There are many factors to consider when valuing a tax preparation business. Understanding valuation multiples for a tax preparation business can be complicated. However, it is a crucial part of the valuation process. As such, it is best to receive a business appraisal. Peak Business Valuation, business appraiser, is happy to help!
During a business appraisal for a tax preparation business, we analyze the strengths and weaknesses of a tax preparation business you are buying or selling. In addition, we will determine the valuation multiples that are applicable. Doing so, the appraiser determines the fair market value of a tax preparer. The business appraisal can then help you take the next steps in maximizing the value of a tax preparation business.
Peak Business Valuation works with tax preparation businesses across the country. We are happy to provide you with the information you need to buy, expand, or sell a tax preparation business. We can also answer any questions about valuation multiples for a tax preparation business. To learn more about valuing a tax preparation business, schedule a free consultation with Peak today!
Valuing a Tax Preparation Business, How to Value a Tax Preparation Business, and Value Drivers for a Tax Preparation Business.
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