How are accounting practices valued?
Accounting practice valuations can be performed in a number of ways, but often valuations of a business, an entity, and a book of clients can be confused. It is ironic that accounting practices are often valued using an Industry Rule of Thumb (being a shortcut methodology), where most businesses rely upon accountants for expert guidance in the area.
The Industry Rule of Thumb (IRT) methodology is a common procedure or practice used to value a business or entity within a given industry. These procedures are based on past valuation experiences and estimates in that industry, rather than specific calculations. Rule of thumbs typically involve using multiples that are relevant to whichever industry the valued firm is in. For example, small to mid-sized accounting firms are often valued on the basis of X times revenue (often in the range of 0.8 to 1.2). In the case of an accounting practice, the IRT valuation methods relate to valuing a package of fees produced by a group of clients that produce a certain level of fees on an annual basis. It is not necessarily the entire business that is being valued, rather the recurrent revenue that is being valued as an asset of the business or entity. As such, it is not the business being valued, as different practices will have different costs, different risk profiles, operate in different geographical locations with their own specific economic influences. The most appropriate method of valuing an accounting practice should therefore seek to value future earnings, utilising a capitalisation of future maintainable earnings methodology that includes a capitalisation rate that addresses the specific risks associated with that particular business.