Pricing and Payment Pattern

Pricing

In most cases, a sale of an accountancy practice amounts to a sale of the goodwill in the practice.  The main constituent of this goodwill is the recurring fee base in the practice.  Owens Professional does take the view that, if a practice can show that it has been generating a consistent turnover for a period of years which is greater than its recurring fee base, then the additional value of this one-off work should be included in the fee base and therefore in the goodwill valuation.

The value of the goodwill is determined by a multiple being applied to the annual fee income. As a general rule of thumb, this multiple is between 0.8x to 1.1x . This multiple is determined by the profile of the practice, considering factors such as its location, its client type and its profitability.

The price multiple for sales in excess of c£500,000 tends to be lower. In such cases the structure of the deal is frequently more complex, involving partners retiring, remaining as consultants, becoming equity partners in the larger firm or joining as salaried partners or employees. Payments in these cases is likely to be a combination of capital payments for goodwill, reimbursement of capital accounts, consultancy payments or an equity share in the continuing practice.

Payment Pattern

Payment for the goodwill is normally made over a deferred period rather than all up front.  The payment period is usually determined by the size of the practice.  It is generally the case that the smaller the practice, the larger the payment on completion and the larger the practice the smaller the sum on completion. So one may find that for a £50,000 practice then 75% is paid up front and the balance after twelve months whereas with a £350,000 practice there may be one third paid up front, another third after twelve months and the balance after twenty-four months.

Most sale agreements include a ‘clawback’ clause, by which the purchaser only pays for the fees which are retained. While the initial payment made to the seller on completion is a non-refundable payment, the future outstanding payments will be adjusted depending on the value of the fees that have been generated over the payment period.  Normally, deductions are made to any balancing payments on a pro rata basis for clients lost during the first year and sometimes at 50% in the second year if the clause extends to a second year.