CPA Practice for Sale! Tips for a Successful Purchase Process
By: Tanya Farmer
If you have an accounting business for sale, you are likely concerned about how the sale will proceed and if the sale will ultimately be successful. The good news is that there are many resources available to ensure the sale is a success and to make the entire process much easier for you. Below are a few helpful tips to keep in mind if you have a CPA practice for sale.
Time it Right
Too many owners of accounting firms go into business thinking that they will sell their businesses when they hit retirement age and can start receiving federal retirement benefits. However, there are many other factors to keep in mind before listing your accounting business for sale. Consider your physical health, your financial situation, your practice’s current financial status, and any family concerns before you make a big move.
There are peak times at which to sell an accounting business, and those may not align directly with your own personal life plan. If you do not sell your business when the market is at its peak, you could be leaving money on the table, or lose out on the sale altogether. Waiting until retirement is not always the right answer, and sometimes, it may be more beneficial to sell sooner. You want to make sure to sell your business when it’s at its financial peak – not once you’ve slowed down your practice as you reduce your work hours preparing for retirement. In short: do not Retire In Place!
Make a Good Impression
It is true that potential buyers need to make a good impression on you, but you also need to make a good impression on them. After listing your accounting business for sale, buyers will come to look at your office. Make sure the lobby and front areas are clean and organized, as well as the individual offices. Make sure that your facilities and staff will make a good impression. This also means making sure you have the most up-to-date accounting software, records, and client and employee agreements all ready to show prospective buyers.
Enlist the Help of a Business Brokerage Firm
There are many unknowns when you have a CPA practice for sale, and that can make it a difficult process to navigate on your own. Our Washington-based business brokers at Private Practice Transactions can give you the best chance of avoiding common pitfalls. We know how to properly screen prospective buyers, prepare your firm for sale, and give you the best chance of success with the final transaction. If you are thinking of selling your accounting firm, call us today at (253) 509-9224 or contact us online to learn more about how we can help with your sale.
Steps for Buying a CPA Firm
By: Justin Farmer
There are many reasons you may want to buy a CPA firm. One of the main reasons many CPAs buy an existing firm is simple: purchasing an accounting firm that is already up and running is much easier than starting one from scratch. Buying an existing firm, along with existing operations, also minimizes the risk associated with starting a business because the firm will (a) have existing clients (and therefore work in progress and accounts receivable), (b) have an existing space and infrastructure in place (phones, email, server, filing systems, and the like) and, last but certainly not least (c) have existing staff members. These are just a few of the most critical aspects of any accounting firm and, when combined, create an opportunity that simply is a safer bet than starting from scratch.
Still, you must follow the proper steps before purchasing any firm to ensure it is successful, and a business brokerage can help. Below is a quick summary of the most important steps you should consider:
Look for Firms with Retiring Leaders
When accounting firm leaders are nearing retirement age, they are also often considering selling their firms. Identifying these firms early and establishing a relationship with the leaders is a great way to get your foot in the door, and increases the likelihood they will be ready to negotiate a deal when the time is right.
Focus on Profitability
When buying a business, too many people focus on how much revenue the firm has, instead of how profitable it is. Revenue is important, but it is also important to investigate where that revenue is going. Is there a lot of overhead and expenses eating into that revenue? If so, that revenue may not be as beneficial as you think. Also consider how you can make the firm even more profitable in the future. This can help ensure you are purchasing a firm that has room to grow.
Make Sure There is Chemistry
To move in as the leader of an accounting firm, it is important that you and the clients both feel comfortable. Determine if there is chemistry with the existing clients and if your vision and expectations align. Determining if you have chemistry with the outgoing owner can be helpful with this. He/She likely has chemistry with his/her clients and if you have chemistry with the owner, you will also likely feel that with the client base.
Ask for a Familiarization Period
Purchasing a firm without first familiarizing yourself with the clients and processes is risky and could lead to many problems. Ask the owner for a familiarization period so you can see how the firm is currently being run, meet some of the clients, and have the chance to ask all the questions necessary to make you feel comfortable.
Contact a Business Brokerage to Help
When buying any professional firm, you should not do it alone. There are many things that can go wrong, and a Washington brokerage firm can help ensure those things do not happen. At Private Practice Transactions, we will assist with the purchase of your new firm and make sure the entire transaction goes as smoothly as possible. If you are thinking about buying an accounting firm, call us first at (253) 509-9224 to learn more about how we can help.
Succession Versus Sale
By: Tanya Farmer
In the most recent issue of the Oregon State Bar Bulletin, Lee Wachocki provides great strategic insight into the option of choosing a successor rather than selling your practice. Our very own Justin D. Farmer contributed to the article, titled “Sales Isn’t The Only Option.” You can read the full piece by clicking here. Following is our own synopsis and comments:
Frankly, not every private law practice can be sold. There are several factors that impact transferability, but “retiring in place” is often the biggest culprit. Some attorneys find this out the hard way as they near retirement age and are unable to find a buyer for their firm. If you are the most valuable asset of your small law firm, then you may also be experiencing this difficulty and wondering what to do.
Consider finding a successor for your practice, rather than a buyer. If you properly integrate your successor into the practice (think ownership from the outset or a very clear path to ownership), then over time you will be afforded an easier transition into retirement without needing to worry about the future of the business you have built.
Without a doubt, the true assets of your firm are its intangible assets, meaning the goodwill you have built, the loyal client base, and your firm’s name recognition. While your tangible assets (desks, computers, and the like) have some value, that is not truly what a buyer is looking for. Thus, you lose out on the intangible asset value when you retire abruptly. Thus, putting a succession plan in place whereby you gradually transfer the goodwill to another attorney will help ensure the success of your business for years to come.
So, how do you choose the right successor to take over your small law firm? Look for someone who you trust and who is interested in running a business, not just practicing law. Just like any other courting process, identify the attributes that will signal success: amazing work ethic, impeccable references, strong writing skills, and the right personality/temperament for your clients. Make sure your successor’s philosophy of law practice aligns with your own to maintain the integrity of the mission of your firm. Once you have narrowed down your field of finalists, consider giving your top choice a trial run. Bring them in on a case as a contractor or consultant. If it does not seem like a good fit, move on realizing that you have not committed to this person for the long term.
Once you have chosen your successor, you can begin your transition into retirement – but do so slowly. Abandon your traditional notions of what this should look like. Every practice is unique, and every transfer of ownership to a successor will be unique, too. Get some outside advice as you put together your succession agreement and work with your successor to come to terms on what your ultimate compensation will be. There are no hard and fast rules here, and having an experienced professional assist you in drafting these contracts will make the entire process run more smoothly.
Your small practice means the world to you because you built it with your own two hands. Do not give up hope because you are having a hard time finding a buyer. Transition slowly into retirement by handing operations over to a successor who can carry on your legacy. With the help of trusted professionals like those at Private Practice Transitions, you can make this transition gracefully, and enjoy peace of mind.
Why do I Need a Business Broker to Buy a Company?
By: Justin Farmer
Purchasing a business is a huge investment. It is definitely not something that can be done on a whim, or without the necessary experience and knowledge backing up the purchase. There are many things you must take into consideration when buying a business, and this is why so many buyers choose to work with a business broker before the sale is final. Business brokers bring many benefits to individuals who are looking for a company to purchase, including those listed below.
A Business Broker Will Know What Companies are for Sale
Perhaps you already know the exact business that you want to buy, but maybe you do not. Maybe you simply know that now is the right time for you to make an investment. When the latter is the case, a business broker will have inside knowledge about what companies are for sale, and which one will fit your needs and wants. Even if you are purchasing a franchise, you should still speak to a business broker who will help you whittle down the list of thousands of franchises to find the one that will work best for you.
A Business Broker Will Know What Companies are Worth Your Investment
Just because you buy an existing business does not mean that it is automatically going to be a success. Business brokers do not only know what companies are for sale, they also know which ones are successful and which ones are on the brink of failure. You do not want to make such a huge investment only to learn soon after the agreement is final that the business is about to fail. You will only end up spending your time trying to fix what has gone wrong, and there is no guarantee that those measures will work, either.
Business Brokers Understand the Legality of the Purchase
There are many legal considerations to think about when buying any company. You will not only need to ensure that the initial offer is structured properly, but the rest of the deal is, as well. You will need to draft certain contracts properly, ask for the proper tax documents, and more. A broker will understand what this is and ensure your rights are protected, and that you do not face any liability shortly after the sale.
A Business Broker can Help With Financing
The chances are that you are not going to purchase any company with your own cash, so you will need to secure financing in order to do it. A business broker can help you determine what financing options are best for you, and will help you secure it so your purchase goes as smoothly as possible.
Call Our Washington Professional Business Brokers for the Help You Need
Now that you understand all the benefits a professional business broker in Washington can bring, it is time to find the right one for you. At Private Practice Transactions, we have the experience necessary to help you with every step of your purchase and make sure your new company is the success you have been envisioning. Call us today at (253) 509-9224 to learn more about how we can help.
How to Determine What My Law Firm is Worth
By: Tanya Farmer
You have worked hard and built your law firm into something that you are immensely proud of and that you value a lot. When it comes time to sell your firm however, it is not the value you place on it that matters. You need to determine how valuable potential buyers will find your firm because that is what you will ultimately receive for it. While you may think it is going to be difficult to ignore your own emotions when evaluating your law firm, there are a few factors you can use to help you step back and really see how much your firm is worth.
Concrete Factors to Consider When Evaluating Your Law Firm
There are some concrete factors to consider when placing a value on your law firm. These factors include actual dollar figures that can help determine how many assets and liabilities your law firm has, how much it pays in overhead, such as in property taxes and payroll, and more. Using these figures is a good place to start when determining how much your law firm is worth because they are definitely stats and numbers potential buyers will want to see. To determine the value of these factors, you will need to use several different documents including:
- Financial statements
- Tax returns
- Titles to assets
- Banking records
- Debt agreements
- Lease agreements
- Insurance policies
- Payroll
You already know that there is more that goes into the value of a law firm than just these factors, but they are certainly a great place to start.
Other Factors When Evaluating Your Law Firm
When selling your law firm, buyers are not only going to look at the firm’s financial documents, they will also look at other factors of value. These will include:
- Client lists: Although there is no guarantee that your clients will stay on with the new buyer, there’s a very good chance they will. A substantial client list also tells the buyer that they are purchasing a reputable law firm, which adds to its value.
- Staffing: Much of the time, your staff will stay on with the buyer, particularly if you are retiring or getting out of the industry. When you have sufficient staff and they are knowledgeable, friendly, and helpful, that also increases the value of your firm.
- Reason for the sale: Certain reasons for the sale, such as retiring or relocation, will not decrease your firm’s value. However, if buyers feel as though you just need out, particularly if that need is urgent, they may wonder why that is and it could hurt your ultimate sale price.
Finding a Buyer
Of course, determining the value of your law firm is only part of the battle of selling. You also need to find a buyer willing to purchase it for the amount you would like.
Fortunately, there are many ways to find the right buyer. Many attorneys simply rely on word of mouth. The legal community is often a small one even in the biggest cities, and by telling a few people within it that you want to sell, word often gets around.
If you do not receive a lot of interest when relying on word of mouth, you can also post an announcement in your local and state bar newsletters. Lawyers often read these regularly and so, if someone is thinking of purchasing an existing firm, it may help you with your sale.
Lastly, you can also always go online to find your perfect buyer. Post an announcement on your own website or blog or even post about the sale on websites such as Craigslist. This will tell thousands of people about the sale with just one ad.
Get Help from a Washington Professional Business Broker
If you are thinking about selling your law firm and need help evaluating it or finding a buyer, our professional business brokers in Washington can help. At Private Practice Transactions, we can help with every aspect of the sale and ensure that it goes as smoothly as possible. Call us today at (253) 509-9224 to learn how we can assist with your sale.
How to Buy a Law Practice
By: Justin Farmer
Whether you have started a law practice and are looking to expand rapidly, or are thinking about leaving a large firm and venturing out on your own, buying a law practice – buying a business – may be right for you. Regardless of where you are in your career, it is much easier (and more cost effective) to buy a law practice than it is to start one all on your own. Many attorneys do not even consider purchasing a law practice because they don’t realize they can, and/or they don’t know where to even start with the process. However, buying a law practice is both possible and a great avenue to pursue for the savvy business person. Below are a few things to consider if you are thinking about starting your own practice.
Find Law Practices for Sale
You can’t purchase an existing law firm if you can’t find one for sale. Unlike real estate, you won’t find a “For Sale” sign outside of a law firm, even when the owner(s) of the firm want to sell their practice. So, how do you find a firm that you can purchase? One organic path is to network with older attorneys who may be looking towards a transition in the near future. You will know them by their gray hair. You can also look in registries created for this niche, such as the one found on the Private Practice Transitions’ website. Registries of this kind are created by experts who are available to answer your questions. If you’re just doing initial research, BizBuySell has been known to contain listings of law practices for sale in the past, though obviously the platform doesn’t provide any support beyond the listing.
Consider the Practice Type, Client Base and Branding
Of course, you do not want to buy a commercial law firm if your area of practice is personal injury law. You need to first consider your long-term goals, what type of attorney you want to be, where you want to practice, and in what area or areas of law to ensure that you target the firms that most align with your experience and goals. If you do not yet have an area of law to which you have dedicated your practice, consider your personality, your interests, your values, the learning curve to be successful in a certain type of law, and, honestly, whether you have the dedication and drive to absorb a new practice focus.
Similarly, it is important to review the firm’s existing clients to gain an understanding of the needs being met and whether those clients seem like ones with which you would have good chemistry.
Do Your Due Diligence
Due Diligence can, and should be, extensive. You should review financials, tax returns, cash flow projections, and meet with each owner and key staff. While making the decision to purchase a firm is important, due diligence will be the most time-consuming and enlightening step in taking over a practice. When conducting your due diligence, it is important to assemble a purchasing team, to include your financial advisor (how will the purchase of the firm help you with your long-term financial goals?), your CPA (what are the tax benefits of purchasing a law firm?), and an advisor who can help you with deal structure (asset purchase versus stock purchase versus asset purchase treated as a stock purchase?). These professionals will be able to help you request and review the relevant seller-provided materials and documentation. You will then be able to utilize this information to draft a final purchase agreement so that you can move forward with the acquisition and proceed with closing.
Create a Transition Plan
After the sale, there will be a transition period. Think of it as a new business and, with that new business there must be a business plan. So while the transition occurs after you purchase the practice, planning for that transition should occur before (i.e. during due diligence). This plan should include a detailed (yet organic, as things change) checklist of items that you will need to work through, including (a) production (who will be responsible for what work and at what level moving forward?), (b) firm management (hiring, firing, vendor management, lease negotiations, technology, and marketing plans), and (c) “all the things” that the old owner was responsible for, but now you will be taking care of. However, it also must be flexible enough to adapt to the changing business environment. During this phase the seller should transfer the knowledge base, key clientele, referral networks, and other elements to give you the best chance of success in your new firm.
Contact a Washington Brokerage to Help
When purchasing a law firm, you should not do it on your own. At Private Practice Transitions, we are the pre-eminent professional services brokerage in Washington. We will ensure you have the support and guidance that you need during the purchase and sale process. If you want to buy a practice so you can lead your own law firm, call us today at (253) 509-9224 or contact us online to learn more about how we can help.
How to Sell an Accounting Practice for Top Dollar
By: Tanya Farmer
Baby Boomers are retiring en masse across all industries. And while the majority of accounting firm owners are baby boomers who are near the age of retirement (65 or older), just as many younger professionals are coming of age and seek to run their own businesses. For the former group, whether you want to retire, semi-retire (perhaps you just want freedom to travel without firm administration hanging over your head), transitioning the ownership of your firm should be high on your list of priorities. If you are asking, “How can I sell my accounting practice and get top dollar?” you will want to consider the tips below.
There is a Buyer for Every Size Accounting Practice
While the buyer universe is larger for smaller practices (less than $500,000 in gross revenue), there is a buyer for every size practice. With zero-down (yes, no money down) conventional financing options up to $1.2 million, the market for buying and selling any size practice is hot. We have found that, generally speaking, the buyer of a smaller practice is often looking for a “merger of equals”, meaning their firm is roughly the same size. Of course, larger firms also look to smaller practices, as it is often a less time-consuming task to absorb the work, provide notice to clients, manage the staff needed to ramp up production and, in general, integrate the practice. A larger practice (more than $500,000 in gross revenue) offers its own unique selling features as well. Often a larger practice will have more, and tenured, professional staff and stronger systems in place. In truth, a large part of the value of a firm, large or small, in today’s virtual 0% unemployment market, are the people employed who will join the acquiring firm. Whether you are the owner of a large or small accounting practice for sale, it is important to prepare now for your transition. Speaking to a professional business broker can be the best first step.
Continuity of Client Relationships Increases Value
Selling an accounting practice is not like that of a widget factory. A widget factory owner does not need to transition the widgets; they are simply sold. With an accounting practice, relationships, and goodwill from the same, is what is transferred. As such, in order to obtain top dollar, and ensure clients will remain with the new owner, remaining on as an employee or consultant will dramatically increase the value of your firm. We have found that, when the former owner remains involved in some capacity for a reasonable period of time, the acquiring firm experiences a nominal (the normal yearly level) of client attrition.
As such, you will need to consider the cultural fit of the acquiring firm (or personality of the individual buyer) to ensure that there are enough similarities. This will ensure clients stay even after you go, and will make it more comfortable for staff members involved in the transition.
Understanding the Buyer Market
As an accountant, you are intimately aware of the busy seasons. Accordingly, going to market immediately after the April 15th deadline is best. You will get the most interest, have the most time to be selective and vet a buyer, and also ensure that you are not putting yourself in an untenable transition plan. Keep in mind that putting a deal together can take several months, so you will be nearing the busy season (again) come closing of the transaction. More importantly, when you sell your accounting practice just before your most profitable cycle, the buyer can hit the ground running, realize a quicker return, and, therefore, be able to service any debt more easily.
Modernize Systems and Technology
Systems and technology are rarely the main selling point of a practice, but they certainly impact value. Imagine that a new owner can “hit the ground running” with your electronic filing system, that your accounting software is backed-up to a server and notice to clients can be automated. That is a huge selling point in that it paints a clear picture to the new owner about how quickly the transition can occur with minimal staff and client interruption. Conversely, if you are still hosting outdated accounting software and have not gone paperless, you will want to strongly consider upgrading before the sale. Older technology tells buyers that they will have to work harder to achieve the profitability they seek. However, if you invest in cloud accounting software or tax management technology, it demonstrates to buyers that you are able to conduct business quickly and efficiently. This means that the buyer will benefit directly as well.
Call a Brokerage Firm for Help
In addition to the tips above, if you are still wondering, “How can I sell my accounting firm?” consult with a Washington business brokerage that specializes in professional service company sales. At Private Practice Transitions, we can accurately estimate the value of your business, search for and interview potential buyers, help secure financing, and ensure a seamless transition occurs.
If you are selling your accounting firm and want to get the best deal possible, call us today at (253) 509-9224 or email us at [email protected] to learn more about how we can assist with the sale of your practice.
Private Practice Transitions Names Chandler Hueckel Director of Client Services and Financing Specialist
By: Justin Farmer
GIG HARBOR, Wash. (April 10, 2019) – Private Practice Transitions, Inc., a Gig Harbor-based professional business brokerage, has announced that Chandler Hueckel has been named Director of Client Services and Financing Specialist.
Chandler has 15 years of experience in the banking and finance industry in Washington and Oregon. During his time in banking, Chandler focused on financing the acquisition of small to medium-sized companies utilizing SBA and conventional lending options, and gained a deep understanding of complex deal structures and creative financing.
Chandler earned his Bachelor’s Degree in Business Management and Finance from Western Washington University, and grew up in Olympia.
Said Justin Farmer, Private Practice Transitions’ President and Founder, “Chandler’s unique and well-developed skill set in finance, and experience helping buyers and sellers get to the ‘finish line’ on transactions, has made him an asset in business finance and acquisition matters. He brings a client-centric focus to each transaction and presents a high moral compass that helps each party involved thrive. We are thrilled to have him join us.”
About Private Practice Transitions, Inc.
Private Practice Transitions is the preeminent provider of business brokerage and consulting services in the Northwest, catering specifically to the owners of professional service businesses. Brokers work exclusively with the owners of professional practices in the legal, healthcare and financial services industries and help client prepare their practices for sale, provide valuation services and facilitate sales transactions. The firm offers Legacy Transition Brokerage™, Third-Party Brokerage, and Broker’s Opinion of Value services. For more information, visit www.privatepracticetransitions.com.
Justin Farmer Named to South Sound Business 40 Under 40 Class of 2018
By: Tanya Farmer
TACOMA, Wash. (Oct. 3, 2018) – Justin D. Farmer, 36, Founder and Principal of Private Practice Transitions, Inc., a Gig Harbor-based professional business brokerage, has been named to South Sound Business magazine’s 40 Under 40 list for 2018.
South Sound’s Business’ 40 Under 40 recognizes community leaders under 40 years old who are thriving in their respective industry and making a mark in the South Sound region. Nominations brought forward outstanding candidates for consideration — individuals who have accomplished a significant amount and made great contributions to their business or organizational workplace and the community overall. Close to 100 nominations were received in 2018, and analyzed, debated, and judged by the South Sound Business editorial board, resulting in a strong group of nominees to represent the community.
Justin is a lawyer, licensed business broker, and entrepreneur. He launched Private Practice Transitions in 2014 after having gone through the arduous task of vetting a private practice that he intended to purchase. He now leverages his unique background and has facilitated deals for more than 40 professional services firms since founding the company.
Justin has served as an Assistant Attorney General, private practitioner, and legal recruiter. He first attended the University of Washington where he received a Bachelor of Science having studied Marketing, Entrepreneurship, and Finance. Justin then attended Seattle University Law School where he served on the Student Bar Association as President and Treasurer, participated in Moot Court competitions, clerked for a Superior Court Judge, worked for a boutique real estate and business law firm, and interned with the King County Prosecuting Attorney’s Office and Department of Assigned Counsel.
After graduation, Justin served as an Assistant Attorney General in Olympia where he acted as “in-house” counsel to Washington’s largest state agency and provided advice to various “business” divisions within the organization. He also has several years of business law experience, both transactional and litigation work. Justin has extensive experience as a legal recruiter and has mentored countless young professionals on the art of networking and career transitions.
Justin recently earned his Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA). The CBI is a prestigious designation exclusive to the IBBA that identifies an experienced and dedicated business broker.
What is Your Business Worth? 6 Rules of Thumb to Consider
By: Justin Farmer
I work with extremely successful and exceptionally bright professionals who, after years of hard work, have grown a business that has going concern. But like most savvy business owners, my clients come to realize that it is time to transition and “pass the baton”, so to speak, to a younger professional who can carry the business into the next generation. But selling a business is a lot of work. And certainly selling a professional service business must be harder (or so many of my clients think). Then the question remains: is it worth it? The short answer: absolutely. Sure, there are countless moving parts and factors to consider when selling a business. But with the proper planning and team in place, you can maximize your return on investment.
Now that you have decided to sell your business, I am sure you are longing to know how much value can be obtained from selling it. And, even more, how do you go about determining value? Let me speak candidly for a moment: valuing a business, which has grown organically over the course of 20+ years, is no easy task. And while business valuation is not an exact science, I can assure you that there is a way to determine, with 100% certainty, what the value of your business is: put it on the market!
If you don’t want to test the market before having a general idea of what your business is worth (a good idea), take a look at the following six general rules of thumb. With some objective reflection, you should feel confident in what the market will bare when you put your business up for sale.
- Starting Point: In general, the starting point for the value of a law practice begins at 0.9-1.0 times annual gross revenue. If you have an accounting practice, the starting point is closer to 1.0-1.2 times annual gross revenue. Other private practices, like medial or dental, have yet a different multiplier. But as you apply the following factors, you can expect the multiple to increase or decrease slightly.
- Payment Terms: Cash is king. You should plan on having both a cash (lower) and seller-financed (higher) price in mind. For instance, if a buyer brings 100% of the purchase price at closing (or darn near), then you should be willing to take the “lower” cash price as the risk of not getting paid falls close to zero. Conversely, if you are willing to finance all, or a majority of the purchase price, then the total purchase price should be higher.
- Ownership Transition: The more you are willing to provide by way of transition assistance, the higher the potential multiplier. Keep in mind that with either a cash or financed price, the buyer is paying you for a certain amount of transition assistance. As a seller, you should expect to provide transition services as part of the deal, including making introductions to key clients, referral sources, and the like. But the more you are willing to help ensure a successful transition, the higher the value to the buyer and, therefore, the larger the multiplier you are likely to receive.
- Client Relationships: Continued patronage from repeat clients is an important factor that you should be tracking long before taking your business to market (if you aren’t tracking this, start now). The more you can show that revenue is tied to clients that come back month-over-month or year-over-year (depending on your practice), the better. Think about it: your business is attractive so long as revenue is coming in the door with or without you. So, the more automatic the reoccurring revenue is, the higher the multiplier you can expect.
- Client Concentration: Having revenue concentrated with one or a few “large” accounts can sometimes cause a decrease in potential value of a professional service business. However, the contrary is also true: having no concentration, but revenue that is spread across a variety of clients, can actually increase value. If you do not have a high concentration of revenue tied to any one large client, then you have minimized the risk of losing a substantial amount of revenue if any one client were to leave, thus creating a higher potential multiplier.
- Profitability: Last, but certainly not least, is profitability. How much does it cost to run your practice? How much cash do you have left over at the end of the year? If you are running a professional service business with overhead of 50% or less, then you are in very good shape. Having healthy net income and gross revenue that is growing year-over-year shows a potential buyer that there is less risk of drop-off in the future. And when it comes to determining value, and ultimately finding a buyer who can obtain financing, profitability is something that a lender looks very closely at to determine if the business can service future debt. In sum: higher and/or increasing profitability = higher multiplier.
As you can see, determining the value of your business is really one part science, one part art, and one part math. And while, ultimately, you can assign any multiplier to your business that you want; the true test comes when you take your business to market. Until then, the above should get you moving in the right direction until you are ready for the market to set the actual price.