FINANCIAL FACTS & coin MATTERS Ed...

FINANCIAL FACTS & coin MATTERS

Editor's Note: This article marks the first in a of the present day series devoted to financial advice. expect for alternating topics on corporate finance (Financial Facts) and personal finance (Money Matters) in upcoming issues of Beyond Numbers.

Valuing your practice

You have a small general accounting practice and you plan to retire in the nearest ten years. How much will you be able to gain for your practice?

This article addresses the pricing of small general accounting practices. In today's market, a Lower Mainland general accounting practice with $150000 of recurring billings might exchange on the following terms:

* Selling price for practice goodwill of $150000 or "one times annual billings."

* An upfront cash payment of $40000 with the balance payable quarterly throughout three years, no interest.

* A downward price adjustment for clients missing in the first year following the sale.

* If the practice is incorporated, a share sale. The price attributable to practice goodwill will be discounted by dint of $10,000 to $15,000 for lack of tax shield.

Is your practice worth the same times billings? Some practices will vend for more, but most will exchange for less.

What determines the selling price of a general accounting practice? Consider the following:

Size matters

En bloc buyer of accounting practices attend to to be single individuals. Larger practices and partnership interests trade upon different terms and at different values. For multi-partner practices, pension entitlement is usually a more important issue than price. At a certain billing entrance the issue of goodwill value becomes irrelevant.

Our observation is that the greatest in number saleable general accounting practices are sole-- proprietorships with billings between $50000 and $250000 Financial risk, diminishing get backs to the owner, practice management, and other issues cause the market for larger practices to narrow. While we haven't reviewed many sales of accounting practices with billings in exces of $300000 in our view, "times billing" multiples will very little as practice size increases beyond this opening

Quality

We've uttered prices as a multiple of billings, yet not all billings are created equal.

Whether you obtain a high multiple or whether your practice is saleable at all be pendents on the quality of your billings. Factors considered in choosing billing multiples include:

* Are clients paying their bills? "Billings" are infered billings, not invoices issued.

* Is the work recurring? As buyer are paying for prospective earnings, you should wait for a negotiation with the buyer as to in what way much "non-- recurring" work should be exclud from billings.

* What is the reckon uponed persistency of the client work? Special work from referral sources and work obtained from personal contacts alone has a value if the relationship can be passed upon to a buyer. If the "goodwill" is personal, it has no value. on the same level if the purchase price includes these exemplars of billings, prospective loss of the work will normally trigger a downward price adjustment.

* in what way profitable is the work? to what extent many hours does the buyer have to work to generate the earnings? The higher the buyer's prospective profit by means of hour worked, the more valuable the practice.

* What is the composition of billings? While buyer are not stratifying billings into audit, review, compilation, personal tax, etc and applying different multiples, the pattern of engagement definitely matters. While audit work was deliberation to command a premium ten years ajo, in today's market, compilation engagements are frequently considered more valuable.

* What is the potential for practice growth? Does the buyer have the opportunity to increase billings? by what means old are the principals of client companies? The higher the potential for billing and profit putting out the more valuable the practice.

Prudent buyer apply the mind at the "times billings" multiple as a measure of reasonableness, unless determine price based on a discounted cash follow analysis or excess earnings approach. In applying those approaches, practice earnings are reduc on the opportunity cost of the buyer's labour. A quality practice with higher hourly earnings potential and/or lower practice risk will command a higher price.

Location

As in real estate, accounting practice value is location, location, location. explanation questions to consider in relation to practice location include:

* for what cause competitive is the market? An alternative to buying a practice is to hang on the outside a shingle and wait for the clients to result In a competitive market, where clients are difficult to obtain, an established client base is more valuable. If clients are easily obtained, wherefore pay for them?

* for what cause desirable is the local lifestyle? A practice in an attractive location is worth more. equable if some accountants don't have personal lives, their families do.

* in what way many buyers are there in the local market? Larger cities watch to have a population of potential buyer In smaller midmost points there may be no local buyer

There is a ready and active market for practices in the Lower Mainland, southern Vancouver Island, and the Okanagan. Outside of these urban areas, it's a tougher sale at a lower price.