Value Drivers of an Accounting Practice
An accounting practice typically sells for a valuation multiple of 1-1.5x revenue. That range leaves quite a bit of wiggle room. What sets apart a 1.5x practice from a 1x practice? In this article, we will explore the value drivers that drive the value of your accounting practice. These drivers can give you ideas to implement in your own practice and increase your confidence when you are preparing to sell your business. Implementing strategies based on these value drivers will increase the value of your accounting practice. For more information, see Valuing Your Accounting Practice, or schedule your free consultation with Peak Business Valuation, business appraiser Utah.
Understanding your client profile is crucial in determining the value of your practice. For example, a tax practice could perform tax returns for individuals and/or businesses. Typically, businesses bring in more revenue per client than an individual. You can also offer extra services to the business like bookkeeping or consulting. A metric to measure this is the average revenue per client type. Understanding the amount of revenue generated by client type indicates high client value. The higher the revenue per client the more valuable your accounting practice can be.
Repeat clients are a good indicator of client loyalty. In a transaction, clients that are likely to stay with the business are valuable. There are several client metrics to gauge the loyalty of an accounting practice’s clients. The percentage of revenue that comes from repeat clients is a good place to start. A high percentage of repeat clients indicates loyalty to the practice. As long as these clients are loyal to the firm rather than one key employee, their value is high. For more information see The Value of Customer Loyalty.
One of the recent business models Peak has seen that drives a higher valuation multiple is that of a recurring revenue business model. The accounting practice provides ongoing service by charging a monthly fee. This creates steady and stable revenue which increases the value of your accounting practice. For more information on creating a recurring revenue stream, refer to Growing your Business Through Recurring Revenue.
Another metric to consider is the percentage of clients acquired. Clients acquired by acquisition may have lower levels of loyalty, as they have not been “won over” by the company.
Sales and Marketing
How does the practice grow? An accounting practice with consistent growth is worth more than a stagnant one. Here are some questions to consider when evaluating the growth of a practice:
- How does the accounting practice win new clients?
- Does the practice market to a targeted audience?
- Are new clients “won over” resulting in repeat business?
- Does the practice capitalize on cross-selling opportunities to drive growth?
Accounting practices without a developed “growth engine” may be at higher risk. In an article from AccountingToday, Allan Koltin, CEO of Koltin Consulting, said,
“Too often I find that when firms don’t have a strong growth engine, they end up accepting all kinds of work. Oftentimes that work is low margin or with a higher level of risk tolerance than should normally be accepted.”
Koltin explains here that an accounting practice without growth could indicate riskier, low margin clients. As such the value of the accounting practice, may be lower. For more information see The Value of SEO.
Effective software use is an indicator of value for a practice. Accounting practices that use practice management software increase their task and workflow efficiency. Good software helps an accounting practice stay on track in a deadline-intensive industry. Additionally, cloud software enables staff to work from home. According to a study by CCH, almost one-quarter of companies have staff that works remotely. This trend has increased due to COVID-19. Software that enables staff to work from home is a powerful value-add.
Software can also increase the quality of client relationships. It makes it easy for clients to send you documents and pay for your services. It can also provide cross-selling opportunities. These factors increase the value of an accounting practice as opposed to one working on paper.
In the coming years, some aspects of accounting and auditing may be replaced by technology. In this case, accounting practices that offer niche services will be in higher demand. Some common niches include:
- Wealth management
- HR consulting
- IT consulting
- Industry-specific consulting
These are common niches accounting practices use to set themselves apart from their competition. Identifying a niche can drive business growth and focus your marketing efforts.
There are a variety of ways to increase the value of your accounting practice. By implementing some of the value drivers discussed above, you can increase the value of your accounting practice. Whether you are looking to sell or grow your business, implementing these value drivers will help.
Peak Business Valuation, business appraiser Utah, helps by providing business valuations to value an accounting practice. If you have any questions about your accounting practice and how to increase its value, feel free to reach out to us. We would be happy to help in any way that we can! You can contact us via email or by scheduling your free consultation below!
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