The financial climate across the US has been thriving over the past ten years. Unemployment rates are near record low and small business owners are optimistic about the future. Regardless of what is taking place on Wall Street, the number of small businesses continues to increase. One of the industries that has flourished is the accounting industry. This article addresses market multiples to apply when valuing your accounting business and how to potentially increase the value of your business prior to a potential transaction.
The Accounting industry is slowly changing due to technology, government and employees. As such, business owners are striving to adjust their business. As business owners look to adjust, some have considered selling as a viable option. With the current market, business owners of accounting firms are in a position to sell all or a portion of their business.
When valuing your accounting business there are common rules of thumb that a business valuation professional would adhere to. For instance, the current sentiment for private market multiples is shown below.
Market Multiples for Accounting Businesses
- Revenue multiple: 1.0x – 1.3x
- EBITDA multiple: 2.2x – 6.0x
- EBIT multiple: 2.0x – 7.0x
- Sellers Discretionary Earnings multiple: 1.0x – 3.0x
The spread between these multiples is wide. Reason being, a business valuation professional assesses appropriate multiples to apply to a business based on an infinite amount of reasons. For instance, the average profit margin for an accounting firm is around 19.0%. How does the business for sell compare to the average? How diverse is the customer base and what is the loyalty rate if the owner of the business were to leave? There are countless questions that a business valuation professional should consider and inquire about when determining the value of your accounting business for a potential transaction.
By understanding the market multiples and some of the factors that go into calculating a business valuation, I want to share some tips that can increase the value of your accounting firm. In order to recognize the full effect of these tips, it is best to consider them months or even a couple years prior to selling. However, if you are in the market to find a buyer today, you can still implement these tips.
4 Tips for Accounting Business Owners
Sales & Marketing
Contact each client and ask a series of question that identify why the client has worked with them and how they see the relationship progressing. One of the questions that should be of key focus is how did the client find you. This will help you identify profitable lead sources. If most of your clients are finding you through search results, focus on pay-per-click campaigns to capture more users. If you are finding they are referred to you through word-of-mouth, understand the reason why and the specific words used. This will help target your marketing campaigns.
Taking the time to put in place a sales and marketing plan will not only increase your visibility, but it depicts a vision for a potential buyer. Brian Swanson over at QuickBooks wrote a great article on practical tips for accounting firms in regards to marketing.
During my time at Deloitte, my thought of culture was work, work, work. I managed to work 70-90 hours a week for 6 months out of the year and about 30 hours a week the other 6 months. After four busy seasons, I was ready to move on. My father has operated an accounting firm for over 28 years. The company culture is much different than what is typically found at the Big 4. As a business owner of a smaller firm, the ability to impact culture is great. Creating an environment of communication where the employee understands they are highly valued, is priceless. When employees fill valued, they express those same value to the clients. This ultimately increases client retention.
Everyone needs an accountant of some sort, so this may not be as important. As mentioned under the sales and marketing section, a feedback survey can help identify areas of improvement and areas of strength.
Every business owner understands lack of cash flow can hurt a business. As such, cash flow is key to increasing not only the potential purchase price, but the number of potential buyers. Some of the areas to consider from a billing standpoint consist of the billing cycle. Consider a retainer or potentially billing based on completed work. Start the billing cycle early.
The Journal of Accountancy published a great article back in November of 2015, titled “Maximize proceeds in accounting firm sales”. Very comprehensive read.
Understanding the value of your accounting business is important, regardless of any near future transactions. By implementing some of the points discussed above, you can increase the value of your business.