How To Value Your Accountancy Practice
Understanding how to value an accountancy practice, whether it’s part of a larger accounting network or a standalone firm, is both an art and a science. To do it accurately, you’ll need to grasp a vast range of metrics, including the unique strengths of your practice, the market trends, and key financial metrics.
Our guide to accounting practice valuation explains why it is so important, common mistakes that are made, factors that affect the valuation of accounting practices, and the role industry benchmarks play.
Importance of Valuing an Accountancy Practice
You might want to undertake an accounting practice valuation for three main reasons.
The first is to understand your market positioning and competitive edge better. Without knowing how your value compares to that of your competitors, you have no way of knowing whether your pricing and service levels are competitive.
The second is to establish your future growth prospects and investment opportunities. In order to grow, you may need to seek external investment – but without an accurate business valuation, you may find that actually obtaining this investment is challenging.
Finally, you may want to understand how to value an accountancy practice because of business sale or merger considerations.
Approaches to Valuation
There are three main approaches to the valuation of accounting practices:
1. Asset-based approach
This approach to accounting practice valuation involves totalling up the value of your assets and taking away the value of your liabilities to give a final business value. It needs to include all of your assets – whether tangible or intangible.
Measuring the value of your tangible assets requires considering their age and condition – particularly in terms of business property (if you own your premises outright) and any equipment, like computer hardware. Intangible assets (like your brand, any copyrights you hold, and other assets) can be harder to value as they have no physical presence, and you may need to get a professional to help.
2. Income approach
Here, you focus on your firm’s earnings as well as your cash flow. It’s a method that service-based companies often use for business valuation as their cash flow is generally relatively consistent.
There are two ways to approach an income-based valuation. The first is to divide your expected annual earnings by a “capitalisation rate” based on factors like industry conditions and your firm’s risk profile. The second is looking at discretionary earnings to estimate income-based valuation.
3. Market-based approach
Different sectors will have different rules of thumb regarding business valuation. For example, the number of outlets, customer volume, and business turnover are key indicators of company value in retail. Among our member benefits, you’ll find plenty of advice on how to apply accountancy sector rules to your business valuation.
Key Internal Factors Affecting Value
When working out how to value an accountancy practice, you’ll need to look at three internal factors: three aspects of your business itself that impact its value.
Profitability and cash flow can majorly impact your company’s valuation. If your profitability is low, this will limit the value you can place on your business. Similarly, a poor cash flow can suggest that your business is not financially secure.
Your client portfolio and retention rates will also affect your accounting practice valuation. The stronger your portfolio, the higher the value you can place on your business. Similarly, if you can retain clients long-term – or have clients who use your services, without fail, on a regular basis, this will put you in a far stronger position.
Finally, the age and reputation of your practice matter. Without a proven track record, it is unrealistic to expect a brand-new practice to be valued highly. Similarly, being able to demonstrate positive word of mouth, which translates to an increased client base or good online reviews, will enable you to attach a higher value to your firm.
Key External Factors Affecting Value
There are three major external factors that impact accounting practice valuation, as well as internal factors.
Market demand for accountancy services is important here: you may have the best practice in the world, but if the demand isn’t there, then the value won’t be either.
The UK’s regulatory environment also has a part to play. If the Government implements new policies, regulations or standards that affect your business, these could either increase or decrease the appeal of your business – and, therefore, its value.
Economic factors and industry trends can impact any business valuation either positively or negatively. During an economic downturn or a recession, the appetite for investing in businesses is lower, so company valuations are lower as a result. Industry trends can also play a role: if things are happening in the market that either increase or decrease the need for accountancy services, any business valuation will need to be revised as a result.
Steps to Achieve a Realistic Valuation
A business valuation should be based on realism, not on aspiration. To do it right, there are certain steps you’ll need to follow.
First, gather the relevant data and financial statements. What you need will, of course, depend on the method of valuation that you choose.
Second, analyse your internal business operations to establish strengths and weaknesses before comparing your practice with similar practices in the market. Following these three steps will give you a realistic picture of where your accountancy firm currently stands and hopefully help you avoid making some of the most common valuation mistakes.
Common Mistakes in Valuation
When valuing a company, there are three mistakes that many businesses are prone to making.
The first is overestimating future revenue: while you may have ambitious growth plans, any projections need to be realistic and grounded in fact. You need to be able to demonstrate how you will reach the revenue targets that you have set.
The second is not accounting for outstanding liabilities. All liabilities and debts should be accounted for when assessing the value of your business – omit to include them, and the real picture could be very different from what you’d expected.
Third, don’t ignore market dynamics. If demand for accountancy services has decreased, if competition has suddenly boomed or if the economic climate has changed significantly (either for the better or for the worse), this will impact your valuation. It will need to be changed accordingly.
Role of Industry Benchmarks
Industry benchmarks have an important role to play in the valuation of accounting practices. The annual reports and Companies House data held on other firms in your sector can help you adjust your valuation.
Take a look at businesses that are similar to yours in terms of turnover, size and growth to see how your firm compares. Metrics that can be benchmarked include liquidity, profitability, asset management, and more – and even within a single industry, these benchmarks can vary depending on the type of business being examined.
As well as benchmarking performance against other businesses, staying up-to-date with industry trends is vital. This will not only help you value your own business but also help you understand what you need to do to stand out from the crowd, beat any market challenges, and increase your business value over time.
Accounting practice valuation may sound daunting, but you don’t need to do it alone. With the right support, it can be a far easier process – and we’re here to help.
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