Valuation Multiples for an Accounting Firm
The accounting industry comprises businesses that provide accounting services to individuals, businesses, and various entities. These services may include auditing, consulting, and account preparation. Without accounting services, businesses would face many challenges. As such, there is a steady demand for the accounting industry. According to IBIS World, there are about 88,000 accounting firms in the United States. These businesses generate over $144 billion dollars in sales revenue. As the demand for accounting services increases, it may be an ideal time to buy, grow, or sell an accounting firm. Whether you are entering or exiting the industry, it is vital to understand valuation multiples for an accounting firm.
Valuing an Accounting Firm
Understanding the value of an accounting firm comes with many benefits when buying or selling an accounting firm. To do so, it is important to receive a business valuation for an accounting firm. If you are buying an accounting firm, a business valuation can help determine a fair purchase price. In addition, the business appraiser may discuss effective negotiation strategies. If you are selling, a business valuation for an accounting firm can help you increase its value. You may also discuss a fair listing price for your accounting firm.
Business appraisers use various methods to determine the value of an accounting firm. Often, they will use the market approach. This method uses valuation multiples. This article discusses what multiples for an accounting firm look like.
Keep in mind, this article is only a guide and will use average values. For more specific information, receive a business valuation for an accounting firm. Peak Business Valuation, business appraiser, is here to help! Peak works with accounting firms across the country. We are happy to provide a business valuation for an accounting firm. We can also answer any questions you have on valuing an accounting firm. Start now by scheduling a free consultation with Peak Business Valuation, business appraiser.
Valuation Multiples for an Accounting Firm
In the following diagram, we show average market multiples for an accounting firm. During a business valuation, a business appraiser at Peak often uses market multiples. The values displayed below are only averages. As such, they may not be applicable to your accounting firm. To understand what multiples are applicable, receive a business valuation. Peak Business Valuation is happy to assist! Get started with a free consultation today!
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?
A valuation multiple is similar to a ratio that compares two factors. When using multiples, the expert compares a business’s value to a financial metric. This may include cash flow, earnings, or revenue. For instance, an SDE multiple is a common ratio in business valuation. This multiple compares the seller’s discretionary earnings of the business to the implied value of the business. The appraiser considers the multiples of other accounting firms that have recently sold. Then they determine applicable multiples for your accounting firm to get a range of values.
For example, the seller’s discretionary earnings of an accounting firm are $140,000. When using a 1.93x SDE multiple, the implied value of an accounting firm is $270,200. ($140,000 times 1.93x) On the contrary, if a 3.10x multiple is most applicable, the implied value of the accounting firm is $434,000. ($140,000 times 3.10x)
Peak Business Valuation, business appraiser works with many individuals looking to buy or sell an accounting firm. The following sections highlight average valuation multiples for an accounting firm. These market multiples are what accounting firms are generally purchased and sold at. Since each accounting firm is unique, it is important to note that the range of value may vary. Below, we discuss SDE, EBITDA, and REV multiples for accounting firms. For more information, schedule a free consultation with Peak Business Valuation, business appraiser!
SDE Multiples for an Accounting Firm
Average SDE Multiple Range: 1.81x – 3.25x
According to our data, accounting firms transact between a 1.81x – 3.25x average SDE multiple. To determine an implied value of an accounting firm, apply the multiple to the seller’s discretionary earnings. The calculation is as follows:
SDE X Multiple = Value of the Business
For instance, an accounting firm generates $275,000 in seller’s discretionary earnings and transacts at a 2.51x multiple. In this case, the business value is approximately $690,250.
$275,000 X 2.51x = $690,250
A business appraiser often uses the SDE multiple to value an accounting firm. This is because SDE includes common add-backs in the business appraisal. This may include any personal expenses, a fair owner’s salary, and any non-recurring or non-related business expenses.
EBITDA Multiples for an Accounting Firm
Average EBITDA Multiple Range: 2.99x – 4.45x
The average EBITDA multiples for accounting firms range between 2.99x – 4.45x. 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, an accounting firm has an EBITDA of $200,000. It transacts at an EBITDA multiple of 3.66x. Using the above metrics, the accounting firm is worth approximately $732,000.
$200,000 X 3.66x = $732,000
The EBITDA multiple helps calculate the return on investment (ROI) that the owner expects to make from the accounting firm. The valuation expert will determine if this multiple is applicable to your accounting firm. An EBITDA multiple may be preferred because it includes normalized ratios. These ratios allow the valuation expert to compare similar accounting firms. This is because it normalizes differences in capital structure, taxation, and fixed assets. Additionally, normalized ratios can provide a more accurate estimate of the future earnings a buyer can expect from the accounting firm.
REV Multiples for an Accounting Firm
Average REV Multiple Range: 0.71x – 1.09x
According to Peak’s data, accounting firms sell an average of 0.71x – 1.09x of revenue. A valuation expert can derive the implied value of the business by multiplying the amount of revenue or sales an accounting firm makes by the valuation multiple. Refer to the equation below.
Revenue X Multiple = Value of the Business
For example, an accounting firm makes $757,000 in revenue. It then transacts at a 1.01x multiple. In this case, the business is worth approximately $764,570.
$757,000 X 1.01x = $764,570
The REV multiple represents the total amount of sales revenue generated by the accounting firm. During a business valuation for an accounting firm, experts assess REV multiples of similar accounting firms that have sold on the market. Doing so helps the appraiser determine an applicable multiple for your accounting firm. REV multiples may vary depending on factors such as industry trends, location, and competition. However, small businesses tend to transact on cash flow multiples – SDE and EBITDA. This is because cash flow multiples consider expenses such as salaries, rent, and COGS.
Summary
Using valuation multiples to value an accounting firm can be complex. There are many factors to consider during the valuation process. As such, it is best to receive a business valuation for an accounting firm. Peak Business Valuation, business appraiser, is happy to provide a business valuation! As part of a valuation, Peak will discuss value drivers for an accounting firm. In addition, we will determine the applicable valuation multiples for an accounting firm. This will help you better understand the value of an accounting firm and how to increase its value. To learn more, see Value Drivers of an Accounting Practice. As well as, Valuing Your Accounting Practice.
Peak works with accounting firms on a regular basis. We are happy to provide you with the information you need to buy, grow, or sell an accounting firm. Questions about valuing an accounting firm are also welcome! Start today by scheduling a free consultation with Peak Business Valuation, business appraiser, below!
See also How to Value an Accounting Firm and Valuing an Accounting Firm.
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