ccounting practices and financial planning businesses are valued in different ways. Smaller practices tend to be valued on a multiple of recurring income, however as practices grow they move to an earnings based valuation. Arguably the different methods can produce different results. The differences in reality are more artificial than real.
In both cases the multiples being applied are designed to assess and reflect the risk profile of the business. When these multiples are quoted as industry averages they appear to create a commonality of value, however scratch below the surface and you can identify risk differences between businesses. Experienced valuers and smart buyers do exactly that, and in the process separate the ordinary from the excellent.
When the valuation focusses on maintainable revenues, this is a reflection that the value emphasis is on income rather than cost structure. For these businesses costs tend to be both predictable and controllable. The greatest danger to these businesses does not lie in their cost structure but rather in their continuity of revenue. In assessing value you need to understand the revenue profile and risks to that revenue. Trends in acquisition or loss of clients, pricing of services, one off or non-recurring work and stages in the client lifecycle all become important. Accounting and financial planning businesses both have annuity characteristics to their income but this characteristic alone is not a guarantee.
When the valuation focus moves to maintainable earnings, this indicates that the business has grown to a size where the cost structure is equally as important as the income profile. Risk is not simply about ensuring that revenues are maintained. There is a need to manage cost and importantly capacity. For practices that are growing from small to medium in size, the capacity issue is a key driver to value. Does your capacity model allow you to deliver a predictable service to your clients that can be replicated on scale?
Here are 5 keys to reducing the risk profile of your business and increasing its value:
- Strong, reliable recurring income = reduced cost of acquisition of business and increasing marginal profits
- Predictability around pricing creates revenue integrity – have a clear price process
- Manage your business capacity – know exactly what it takes to deliver your client service proposition
- Be tough on capacity management – know the capacity you need and utilise it effectively
- Link your capacity and pricing, then use leverage to create the super profits
Tick these off in your practice and it will not matter which valuation methodology is used. Your business will stack up – consistently.
Greg Hayes is the national chairman of accounting group Hayes Knight. In addition to their accounting services they also provide practice support to accounting firms and a financial services model for delivery through the accounting profession. Greg is also the author of ‘A Practical Guide to Business Valuations for SMEs’ (CCH 2013).
