A step-by-step guide to practice valuation

“As an accountant, you've likely sat exams including bits about valuing businesses,” says Chris Maslin, Founder of Go EO, a consultancy that helps owners transition their businesses to employee-owned.

“But a lot of it […] isn’t of much relevance to a small accountancy firm.”

Maslin recommends a step-by-step process, tailored for accounting practices. 

The first step is determining your profits before tax.

The second is considering the impact of your salary on profits, because a practice owner being underpaid may distort profit margins.

“You may be on £12,000 per year yet work many hours with lots of responsibility and stress,” says Maslin.

“You’re happy to do that, because you own the business, so you receive dividends and are building capital value. 

“The issue is, nobody else would do [your job] for just £12,000 per year, so profits are artificially inflated by your cheap labour.”

Solving this problem requires substituting your remuneration with the fair market value of a replacement employee. 

The third step is adding your actual salary back to your profit, then deducting the salary of your fictional replacement.

The result is your adjusted EBITDA – that is, the practice’s earnings before interest, tax, depreciation and amortisation. 

Multiple this by four, and you’ll have an estimate of the value of your practice. 

For example:

Remember, however, the market ultimately decides value.

“Of course, this figure isn't a ‘correct’ value for your business; it’s worth what someone is willing to pay for it. But it’s an indicator,” says Maslin. 

Other factors to consider 

A variety of factors might impact what someone is willing to pay for your practice. 

“A thorough evaluation of the client base is imperative,” says Vipul Sheth, Managing Director of AdvanceTrack. 

“How big is it? What kind of businesses [make it up]? How diverse and stable are they? 

“A broad client base with strong, long-term relationships tends to enhance value.”

Intangible assets, such as reputation, goodwill and proprietary software, are also important, as is growth potential.

“How will factors such as market trends, technology advancements and changes in regulations impact [the practice’s] position now and in the future?” asks Sheth. 

The type of buyer can make a big difference, too, says Maslin. 

“Often, a trade buyer will offer the best price,” he says. 

“They may be in a position to benefit from synergies with your firm.”

Maslin suggests a trade buyer can lead to redundancies among existing staff – but Maslin suggests “a good trade buyer could look after the business and staff well”, so sellers can consider making staffing arrangements part of the sale conditions.

Maslin, whose speciality is employee ownership trusts, suggests considering them for an easy sale that prioritises conditions for ongoing staff.  

“This may not yield the highest headline price, but should be an easy sale,” he says. 

How to increase your practice’s value

In the short term, the priority for a seller should be increasing profits, says Maslin.

Quick wins could include increasing prices, even for existing clients, and ‘upselling’ by offering additional services. Those considering a sale should also examine profit and loss on a client basis, and drop unprofitable clients that don’t have short-term growth potential.

It’s also a good time to review costs. 

“Are there any that can be trimmed back with minimal negative impact?” says Maslin.

In the longer run, focus on streamlining, investing in staff and attracting more clients.

Technology is key to streamlining, as long as it is selected and implemented well to ensure a return on the outlay. 

“Be sure you’re continuously upgrading software and systems to improve efficiency and service delivery, and researching new methods of working,” says Sheth.

You might automate processes such as client onboarding, move to the cloud, or outsource or offshore some operations. 

Take the time to review staff’s roles and strengths, and invest in professional development and supportive resources to enable them to take on responsibilities that deliver greater value to the practice at the same time as providing job satisfaction and career growth. 

“If they have great interpersonal skills that can be utilised most effectively in a client-facing role, why would they be delivering compliance work?” says Sheth.

If, on the other hand, a staff member prefers compliance, Sheth suggests considering whether there is value to the practice in having them involved in more compliance work, but managing its delivery by an outsourced team.

Finally, attracting more clients requires strengthening your relationships with current ones – and, of course, marketing.

“Personalised services, good communication and second-to-none responsiveness ensure your clients are your biggest supporters and brand advocates,” says Sheth. 

“How strong is your marketing?” says Maslin. 

“If it’s great, you'll have a steady stream of new enquiries happy to pay decent fees, so any buyer is acquiring an appreciating asset. If it’s poor, new clients will be few and far between. 

“Hence, churn means the practice is dying a slow death. This is, of course, less appealing to any buyer, even if profitability today may be good, as they’ll need to reverse this trend.”

Prepare for a smooth transition

“If the business revolves around you, it’s hard to step away,” says Maslin. 

“In turn, that makes it hard to sell. You should be looking to delegate, put systems in place, and potentially [create] step-by-step guides for some of the rarer things you do.”

Sheth adds, “Consider your succession plan. Is it clear and easy to action? 

“More importantly, will it provide stability and confidence for potential buyers, plus current and future staff?”