When you are contemplating your practice succession, there is a lot to consider and a lot to do.
Let’s explore some key aspects to help you maximise the value of your accounting practice.
No. 1: Stable, sustainable, and predictable cash flow
Firstly, the larger the positive cashflows, all things being equal, the higher the value of your business. That being said, without question, your practice must have a stable, sustainable, and predictable cash flow to maximise value. If your revenue and cash flow are up one year and down the next, this will be a problem. A loss of major clients or doing ‘one off’ significant projects for clients which are not repeated in subsequent years will impact the value of your practice in the eyes of your future successor. Presenting your business with stable, sustainable, and predictable cash flows, month after month, year after year, will go a long way to helping you maximise the value of your business.
No. 2: Excellent profit margins
If your practice is more profitable (on average), you are likely to attract a premium for your firm, and the opposite is also true. Suppose your practice is run poorly relative to industry averages. In that case, your staff costs are too high; you have higher than average staff turnover, your rents are too high, your productivity is too low, etc., then this will undoubtedly hinder the value of your business. If you are looking to maximise the value of your firm, then you should certainly be focusing on your productivity, efficiency, and profitability.
No. 3: Quality client base
A stable, quality client base will be a critical factor in maximising your practice value. A continuous pattern of departing clients, particularly key clients, will be a negative factor in determining your practice value. Your ability to retain clients will be enhanced by the number of services you provide to clients. Service diversity will also assist in generating a higher average fee per client, which is highly sorts after by many potential successors. Compared to the industry average of around $3,300, better quality practices will have average client group fees in the range of $15k - $20k. An excessively aging client base is also likely to impact the value of your practice negatively.
No. 4: Facilities and equipment
The way a practice presents itself to its clients will often say a lot about the quality of the business. Suppose your office premises are modern and updated and give a professional image, in many cases. In that case, this will correlate to the quality of the practice and, in turn, the value of the business. Conversely, a run-down approach with outdated equipment and poor presentation will be a red flag for any buyer. First impressions are compelling.
No. 5: Lack of reliance on owners to generate revenue
A key killer of value will be an over-reliance on the owner (or a key person) to generate business growth – mainly if something unexpected happens, such as a health issue. When you walk out the door of an evening, does your business? Taking the time to develop your people, systems, and processes will pay handsomely during your succession journey.