What’s the Multiple?

Valuations in the sale of accounting firms have declined in the past few years as more and more Baby Boomer practitioners seek an external solution to their succession needs. The market is behaving in a standard way to supply and demand. In today’s market what is the right multiple if you are buying or selling an accounting firm? Keep in mind this only applies to a “sale”, not a merger. If you merging upstream into another firm, which means you are exchanging your owner’s interest in your firm for an owner’s interest in the successor firm, the value of your owner interest is defined not by the market, but by the owner agreement of the successor firm.

The vast majority of buyers and sellers still start with the notion of one-times fees as a base multiple. More than one-times is still considered a premium. Lots of deals are getting done these days for less than one-times. It isn’t unusual for larger firms to offer 60% to 80% of fees. The average internal valuation in owner agreements based on the most recent Rosenberg Survey ranges from 77% to 89% depending on size of firm.

However, just as important as the multiple are the other terms of the deal. Consider these four major areas of terms:

  • The down payment, if any, and treatment of AR and WIP at closing
  • The payment period for the remaining payments
  • The extent and duration the payments are subject to adjustment for client retention
  • The profitability of the practice in the buyer’s hands including the tax treatment

If the deal has little or no down payment, the payment period is say 6 years or longer, the payments can be adjusted for retention for the entire payment period (a collection deal), and the payments are deductible for the buyer as paid, the buyer may be able to justify a higher multiple. The flip side of those terms may result in the offer of a lower multiple.

We are seeing a lot more creativity these days in deal-terms. Buyers are more prone to offer favorable tax treatment to sellers in exchange for a lower multiple. Sellers are more prone to offer use of their AR and WIP by the buyer for a period of time after closing and accept other changes in terms to enhance the buyer’s cash flow in exchange for a higher multiple. Payment periods are being stretched longer to increase the net cash flow from the practice in order to offer a deal that in the long run is more valuable to the seller.

Keep in mind that the multiple is just one of the factors in a package of terms that defines the value of a practice in an acquisition.

About the Author: Terrence Putney, CPA (tputney@transitionadvisors.com) is CEO of Transition Advisors, LLC, www.transitionadvisors.com, which exclusively consults on succession and growth strategies for accounting practices nationally and ownership transition. He can be reached at tputney@transitionadvisors.com or 913-262-8550.