In the second article in the series, Lucinda Kitchin examines the key questions vendors typically ask as they consider the sale of their goodwill
How much is my practice worth?
The standard answer to this question, if applied to an industrial or commercial concern, is that a business is worth as much as a willing seller will pay at a given moment in time.
Accountancy practices, however, are not similar in this respect. For smaller practices – firms with gross fees of under, say, £350,000 – the current profitability is relatively unimportant. As a general statement, accountants have it fixed in their minds that the ‘going rate’ is what they should be paying, not how much the practice is worth in commercial terms. They do not tend to apply the rules of ROI; instead, they usually seek to pay within the range that represents the current going rate.
Currently, the going rate is between one and 1.2 times the annual recurring fees; as firms are usually not prepared to pay more than that, that is how much your practice is likely to be worth.
By having a number of purchasers who are all keen to buy, the multiple will normally be driven up towards the top end of that range. In the event that you have a larger practice, profitability will be a major factor in determining the value of the practice; however, there are many other factors in the valuation equation, which is where specialist advice is required.
Over what period can I expect payment to be made?
If yours is a small practice of under, say, £150k, you can expect payment to be made in two tranches: a proportion of the consideration will be paid on completion, with the balance on the first anniversary. In the event that your practice turns over £300k or more, you can usually expect to be paid in three tranches, with the upfront payment paid on completion, and the balance typically paid in two equal tranches on the first and second anniversaries.
Should I expect to be paid on an earn out or can I be paid capital sum?
There is no need for a vendor to sell his/her practice via an earn out (in effect a mechanism whereby the firm’s own profits are used by the purchaser to buy the firm from the vendor). Payment as a capital sum is the usual method of acquiring goodwill.
How can I be sure my identity won’t be discovered?
There are no guarantees! If the profile of your practice is being advertised by direct mail to large numbers of accountants, and if it is also promulgated in the financial press, the subtlety with which your profile is disguised is all that stands between anonymity and disclosure. You rely very much on your practice broker having sufficient experience to retain your anonymity until such time as you give permission for your identity to be disclosed on each and every occasion.
• Lucinda Kitchin, APMA. For advice email email@example.com or call 01623 88 33 00.
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