How do we value a Practice?

  • 3 different ways for practices
  • Compare the results of each to come to overall answer
  • Traditional cents per $, also solely used for fee block sales
  • PE multiplier
  • Payback period
  • Valuation methods
    • ‘Rules of Thumb’
    • Pay-back Period
    • EBIT Multiplier
Traditional cents per $
  • Need to have regard to a variety of factors:
    • Region/location
    • Profitability
    • Nature/type of work
    • Scope to add value/new services
    • Age of client
    • Niche/specialisation
    • Write offs
    • Average fee per return
  • This is a subjective factor
  • We see fees in Auckland ranging from $0.60 or less to over $1.25
  • Most are at the lower end of the scale
  • Fee block sales will typically be lower than practices
PE Multiplier
  • Allow wage for senior staff member of associate to service
  • Stability of income and future growth (blue sky) drive multiplier up
  • Normalisation – can be done but better to get the private costs out or clearly identified and verifiable
  • PE of 4 for a good practice, higher for great
Payback Period
  • Clients don’t stay forever
  • Buying an income stream
  • You are not paying to go and find yourself new clients
  • Especially relevant for fee blocks
  • Again allow cost for servicing
  • Payback 3-4 years for fee block, 5-year max for practice interests
  • Calculated after tax and interest so that purchase price/debt fully repaid within these time frames