In valuing professions and white collar service businesses I observe an emerging trend to place less reliance on traditional rules of thumb and an increasing reliance on establishing value based on a multiple of Future Maintainable Earnings.
Accountancy Practices have traditionally been valued based on a “cents in the dollar” of fee revenue. High quality fees may have been priced “a dollar in the dollar” or “ninety cents in the dollar” of annual fees with lesser quality fees priced as low as “sixty to seventy cents in the dollar”.
However eastern states sales and valuations have for several years also been based on a cross- check of this calculation by adopting an EBIT multiple of the practice in an “under management “model, where the partners’ commercial salary packages have been factored into the adjusted profit. An EBIT multiple has then been applied to arrive at market value.
Our GMO valuation team also uses this cross -check and it often confirms the gross revenue method, but occasionally throws up a pricing differential!
We also observe the EBT multiple cross- check gaining credibility in valuations of Financial Planning Practices, Insurance Broking and Mortgage Broking businesses and Real Estate practices with valuable rent rolls. We also consider the EBIT multiple as a second method when valuing Veterinary Practices and other medical professionals.
Recent GMO transactions facilitated in both Accountancy and Rent Rolls indicates Banking Institutions appreciate the presentation of the practice in both an FME by EBIT multiple as well as in a Cents in the Dollar Revenue Multiplier configuration.
If you would like to discuss your practice and how we can assist you in accurately assessing its market value, contact Mehra Kazemi at GMO business valuations. Your privacy is paramount and we assure you of our complete discretion.
Written by Mehra Kazemi Business Marketing & Valuation