Valuing an accountancy firm: A comprehensive guide for buyers

Key takeaways:

• Gross Recurring Fees (GRF) is the primary metric used to assess the value of accountancy firms.
• The quality of the client base, levels of service provided, and fees charged significantly influence the value of an accountancy firm.
• The scale of the accountancy practice and the structure of the deal also impact the valuation.
• An attractive or simple deal structure can be a deciding factor in securing a deal.

Understanding Gross Recurring Fees (GRF)

A key metric used to size up accountancy firms is Gross Recurring Fees (GRF). GRF represents the total fees that the firm can expect to receive from its clients on a recurring basis. When valuing accountancy firms, buyers often apply a multiple to the GRF, typically ranging from just below 1x to over 1.5x. However, where a firm's value sits within this range depends on several factors.

Example:

Let's say we have an accountancy firm, which has a diverse client base that includes both individuals and businesses. The firm offers a range of services such as tax preparation, financial advisory and business consulting.

The firm has a total annual revenue of £500,000. However, not all of this revenue is considered as GRF. GRF only includes the revenue that is expected to recur year after year without significant additional sales effort.

For example, if £300,000 of the total revenue comes from ongoing annual tax preparation services for long-standing clients, this would be considered as GRF.

If the other £200,000 came from a one-time business consulting project, this would not be included in the GRF. If the other £200,000 came from multiple consultancy projects from a reasonable portion of the recurring client base, then buyers will take a view, either increasing the multiple of GRF or adding an independent amount for consulting derived revenue.

However, this is just a starting point. The final value would be adjusted based on various factors such as the quality of the client base, the levels of service provided, the fees charged, and the firm's growth rate and profitability, among others.

Factors influencing the value of an accountancy firm:

Quality of the client base: The type and age of the clients can significantly impact the firm's value. Firms with a diverse client base across various industries and age groups are often more valuable as they are less susceptible to industry-specific downturns and generational shifts.

Additionally, the loyalty and longevity of the client base also matter. A firm with long-standing, loyal clients will be more attractive to buyers.

Levels of service provided: Beyond the basic compliance services, firms that offer value-added services like financial advisory, tax planning, business consulting, and wealth management can command a higher value.

These services not only bring in higher fees but also deepen the relationship with clients, making them more likely to stay with the firm post-acquisition.

Fees charged: Firms that have a value-based pricing model, where fees are charged based on the value provided to the client, are often considered more valuable than those that charge based on time spent.

Profitability and growth rate: A firm's profitability and growth rate are key indicators of its financial health and future potential. It goes without saying that firms with strong profitability and a consistent track record of growth are going to be far more attractive to buyers.

Operational efficiency: The firm's operational efficiency, as indicated by its cost structure and use of technology, can also impact its value.

Firms that leverage technology to automate routine tasks and improve service delivery are often more profitable and certainly more scalable.

Staff quality and stability: The quality, stability, and skills of the firm's staff are critical to its valuation. A firm with a well-trained, stable team that can continue to deliver quality service post-acquisition will be more valuable.

If a firm suffers from high staff turnover or reliance on the retiring partner(s), it will be seen as a red flag by potential buyers.

Market presence: A firm with a strong brand and reputation in its market will be more attractive to buyers than an unknown.

The impact of scale and deal structures

The scale of the accountancy practice also impacts the valuation multiple. Larger accountancy firms tend to attract larger multiples of GRF. For instance, ‘books of business’ with single-handed accountants with GRF of £70k to £150k may attract a lower multiple, especially if the client relationships and service provision are tied to the person retiring.

On the other hand, firms with GRF of more than £1m and a team of around 10 staff, including a mix of senior and junior qualifications and experience, may attract higher multiples.

Deal structures also play a role in the valuation. If you, as a buyer, are prepared to pay the majority or all of the consideration on completion, this represents a nearly risk-free and clean deal for the seller, which may result in them accepting a lower headline value.

Many deals are agreed with a third of the consideration paid on completion, a third after 12 months, and a third after 24 months, with claw-backs or payments contingent on the GRF of the existing clients remaining at the rate on completion.

When in competition with other buyers, the top-line price does not have to be the deciding factor. An attractive or simple deal structure may win the deal.

Keep it simple

Valuing an accountancy firm is a complex process that requires a deep understanding of the firm's financials, client base, services and more. By considering the factors outlined in this article and making informed decisions, buyers can potentially secure deals that benefit both them and the sellers.

Henry Campbell-Jones, Managing Director, Hornblower Business Brokers.

If you have any questions, or you’d like to discuss anything in this article in more detail, contant Hornblower Business Brokers.
T: +44 (0) 20 8090 9380
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