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 stable, sustainable, and predictable cash flow in order 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’ major 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
It goes without saying, if your practice is more profitable (on average), then you are likely to attract a premium for your firm and the opposite is also true. If your practice is run poorly relative to industry averages – your staff costs are too high, you have higher than normal staff turnover, your rents are too high, your productivity is too low, etc, then, this will certainly 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, your efficiency, and your profitability.
No. 3: Quality client base
A stable, quality client base will be a key 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 highly sorts after by many potential successors. As a comparison, whilst the industry average is 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 negatively impact the value of your practice.
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. If your office premises are modern and updated and present a professional image, in many cases, this will correlate to the quality of the practice and in turn the value of the business. Conversely, a run-down practice, with outdated equipment and poor presentation will be a red flag for any buyer. First impressions are very powerful.
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 – particularly 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, your systems, and your processes will pay handsomely during your succession journey.