Valuing professional practices
Professional practices,for example accounting and legal firms, often have little or no productive tangible asset base. Consequently,a substantial proportion of the practice value may sit with intangible assets. These intangible assets can include the assembled work force and the repeat business client base.
One of the key components in determining a professional practice is determining a market salary for the owner practitioner(s). This is particularly pertinent to valuing a smaller practice, where adjusting for a market salary may eliminate any profits available to an investor. Owner compensation is a key issue in court cases, see Corbon & Klousner (2015) and Scott & Scott (2006), an accounting practice and medical practice respectively.
Another key valuation component is the extent that the client relationships reside with the practitioner. If the practitioner leaves are those relationships lost? Does the goodwill reside with the practice or with the practitioner?
Valuers sometimes refer to rules of thumbs for valuing professional practices, for example, eighty cents to a dollar twenty in the dollar of revenue for accounting practices. Rules of thumb, however, are exactly that, they are not a recognized valuation method but more a final sanity check.
Values of practices can vary significantly based on location, margins, the type of client base and the stability of the work force.For example, an international intellectual property law practice is likely to have a more stable and secure revenue stream compared to a personal injury firm operating on a no win no fee basis. See link to valuing a legal practice for more details.
The hypothetical purchaser may influence value. For example, certain listed entities “roll up” small practices with the aim of reducing back-office costs. Listed companies often have lower costs of capital and so the value to a listed acquirer could be higher than with an individual practitioner.
Examples of professional practice valuation engagements include the following:
- valuation of the equity held in a group of veterinary clinics required by the ATO to establish if shareholders eligible for scrip for scrip roll-over relief under Subdivision 124-M of the Income Tax Assessment Act and that the transfer values are substantially the same in accordance with subsection 124-780 (5) ITAA 199
- valuation of a mid-sized accounting practice; valuation required for a partner dispute and potentially for refinancing purposes
- valuation of a boutique corporate advisory practice; valuation required for restructuring purposes
- valuation of a legal practice, for valuing the shares of exiting partners
- valuation of a financial advisory practice; valuation required for tax purposes