Key Factors in Practice Value

Practitioners often ask what their accounting or tax practice is worth but asking that question is like asking what houses are worth. It is not prudent to rely on simplistic rules of thumb when assessing the worth of a practice because various factors will influence its price. The following seven key factors have the most significant impact on the value of a practice.

1. Recurrence of revenues: Professional practices typically consist of clients who return annually for services. Having significant recurring revenues is beneficial when determining the selling price. For instance, a firm heavily reliant on non-recurring services like litigation support may not obtain as high a price as one primarily focused on traditional tax and write-up services. Practices emphasizing ongoing tax compliance over periodic tax consulting hold greater value for potential buyers.
2. Size: The size of the practice is a significant factor because it directly affects the pool of potential buyers. A practice with $300,000 in annual gross revenues is likely to attract more interested buyers than one with $3,000,000. A larger pool of potential buyers generally leads to a better selling price. However, small practices may lose value if buyers perceive them as unable to support their needs adequately.
3. Location: The location of a firm plays a pivotal role in both the number of potential buyers and the overall value of the practice. Practices located in large metropolitan areas often command higher prices than those in rural or smaller city settings. Even within a city, the specific location can influence the price significantly. A practice in a popular, growing area could see a 10% to 20% higher value than an identical one a few miles away. Similarly, practices in high-demand regions tend to command premium prices. Virtual practices where the clients are serviced remotely in a virtual office environment are currently in high demand. As a result, they are commanding a premium in the marketplace.
4. Profitability: Although accounting and tax practices are frequently valued based on gross revenues, cash flow also significantly affects their value. Consider two practices with similar profiles, located in the same area and generating the same top-line revenue. If one practice has a cash flow of 25% while the other achieves 60%, buyers will naturally place a higher value on the practice with greater cash flow.
5. Terms: The terms of a sale are critical and can significantly affect the perceived value of the practice. Different buyers may propose varying terms, such as offering cash at closing, installment payments or a combination of both. While these offers may seem equal in value on the surface, they can have vastly different implications. Offering flexible terms can widen the market appeal of a practice.
6. Negative factors: Several factors can negatively impact the price of a practice. Some of these include client retention concerns, declining growth, inadequate accounting records, over-reliance on a few large clients, long-term leases, owners’ intentions to retain clients or continue working, inflexibility and employee-related issues.
7. Professionally marketed: Engaging a professional broker can make a significant difference in the selling process.  For Sale by Owner listings may not attract the best buyers or offer the best terms. A successful broker provides the necessary experience in marketing, negotiation, valuation and financing. A large, established broker typically has a much bigger pool of buyers wanting to buy practices. That usually results in better prices, better terms and better buyers.

Assessing the value of an accounting or tax practice is a complex endeavor that depends on multiple factors. By understanding and leveraging these key factors, the value of the practice can be maximized, and the right buyers can be attracted for a successful sale.