Why the Fear…? Your Accounting Practice Has Value in the Market!

Author

Jadeja Partners

Date

Monday, 3rd November 2014

3 min read

We constantly hear from accountants that they are going to continue to work in their practices until they drop, as practices can’t be sold. Where has this story originated? We emphasise, almost all accounting practices can be sold, in most cases for quite high Goodwill amounts or multiples. Accountants’ work cannot all be completed by […]

We constantly hear from accountants that they are going to continue to work in their practices until they drop, as practices can’t be sold. Where has this story originated?

We emphasise, almost all accounting practices can be sold, in most cases for quite high Goodwill amounts or multiples.

Accountants’ work cannot all be completed by a computer…not yet anyway.

Yes, accounting practices are going through a metamorphosis, or at the least, substantial changes. There is a fear transactional data, Taxation Office requirements, the background behind composite amounts, etc will somehow drop into a big box (computer) and out will shoot work… but how and when will this come about?

Yes, compilation work will be more efficient, but as I understand it accountants do review work, check for misallocations, reconcile amounts, review financial statements for appropriate tax treatment, keep records for Capital Gains Tax purposes, etc., etc.

I was told of a partner in a firm who listed all the checks completed by that firm and ended up with 78. These included, just in respect of salaries, reviewing salaries to that reported for Workers Compensation, checking against superannuation payments, application of payroll tax (with allowance for associated companies), non arms length salaries, possible adjustments because of FBT applicable payments, etc.

So some of those checks could be programmed into a computer system, but then who will do the adjustments, especially if they involve other entities? Additionally, what computer will speak with the client about their business, discuss results, plan for the future, undertake succession planning, etc?

The client relationship still sits with the practitioner and this is what makes up the main component of the goodwill.

The next concern tends to be due to the profit they make, given their work styles, only covering their salaries. So, no profit equals no value, on a times EBIT bases? Wrong!

Yes, there is a greater tendency to review the net profit of a practice and some prices for goodwill are based on EBIT multiple. Even so, purchasers still review the makeup of the gross fees and then consider the likely profit post transaction.

They would be overlaying fees onto currently held fees, reducing overheads by optimising the use of computers and staff and tweaking for the ultimate return. Thus the purchasers do consider the modified combined net profit they can make from the fees. Hence, higher goodwill prices do emerge.

This is before purchasers include likely fee increases due to better client relationships, improved billing processes, drilling down – building extra client work, etc.

So don’t forget “strategic purchases” and what the implications could be.

Fearful of the sale process? There really is no need; this is what Practice Brokers are for. They have the experience of other deals, see the patterns, assess likely buyers and nurse the deal along.

Clearly it is best if vendors can make changes prior to sale, 3~4 years out, so as to improve their profit through proven processes, but it may be difficult for current owners to implement changes or difficult just due to timing. Even so, clear recorded information on the client list and work done is imperative.

Remember:

Buyers are not always looking for a well-polished practice
There are more buyers than sellers – the practice is worth something
Your client list (properly analysed) on a USB stick, may be your most valuable asset
You know your business well – don’t underestimate your wisdom
Where possible improve your business processes and profitability, make the hard decisions
Incorporate technological innovations step-by-step; it all adds up
Have key staff members under contractual restraints – *IMPORTANT
Be aware of industry landscape changes and their implications
Continuity matters, cultural fit matching is crucial to the transition
Stop worrying, let the practice broker worry – keep your relationships in tact
Use an industry specialist practice broker to disperse the emotion of the transaction