The first question we hear when discussing exit planning for accounting firms is, “What’s my multiple?” And of course, our answer is always, “It depends”.
For a long time the standard benchmark for accounting firm sales was 1.0 times annual revenues. That is no longer the case. Every deal hinges on specific factors that are important to the buyer and seller. Factors that influence the sales price include;
- Size of down payment; with a smaller down payment, a buyer is willing to pay more over the finance period.
- Client retention period; many deals have buyer protection so that if clients are not retained during the specified time period, the sales price is adjusted. For example, if the buyer were to pay one times revenue over four years, 25 percent of collections from that customer base are paid for four years. The longer the seller is responsible for the retention period, the more the buyer is willing to pay, since in effect, the deal is structured as a contingency, measured at a percentage of the actual collections received. If there is limited or no client retention period, the buyer is likely to offer less since there will be considerable uncertainty of client retention and related cash flow.
- Cost synergies; since value is a function of cash flows and risk, if a buyer can absorb the practice with low incremental costs, they will be willing to pay more. Cost synergies can arise when the buyer has sufficient space to absorb the personnel with little additional rent or can leverage the combined personnel to provide higher level of revenues or new revenue streams.
- Payout time period; The longer the payout period, also known as seller financing, the better deal the seller can get, although seller-financing rarely includes interest. Any seller that must have a short payout period, i.e. less than four years, will likely suffer a lower multiple due to negative cash flow affects for the buyer. A longer payout period provides an easier finance mechanism for the buyer and a higher multiple is much more likely under that scenario.
In summary, the actual multiple reflects the resolution of the four terms described above. These terms will determine what a buyer will pay so you should pay attention to what is most important to you and offer leeway on the remaining terms.
Let us know if we can help you achieve your multiple! Contact me for a no obligation confidential discussion.
John Byrne, CPA/ABV