price your practice by gross

bonus checklist: 11 questions to make sure you’re comparing apples to apples.

by ed mendlowitz
the 卡塔尔世界杯常规比赛时间 practice doctor

question: everyone i talk to about what my practice is worth talks about a percentage or multiple of gross. just what is “gross” and why is it done this way?

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answer: you are right that practices are priced based on gross. the main reason is that this method seems to work well. however, there is a wide range of what gross is and how it is applied.

here are some comments.

1. regardless of how a practice is priced, the buyer generally needs to be able to make money from the cash flow they receive running the acquired practice.
2. through custom and proven success, the accepted industry practice has become to price practices based on gross. it works. it is also a simple method and eliminates extensive analysis of the practice being acquired except for the buyer satisfying themself of the validity of the practice’s gross.
3. the percentage paid can be anywhere from 50 percent of gross to 150 percent. this is usually negotiated based on circumstances.
4. for example, buying from a widow two months after the accountant died might only be worth 50 percent of the annual gross, while a planned immediate orderly transition might be worth 100 percent to 125 percent, and a practice with very high fees might be worth 150 percent or more.
5. commodity-type practices might have a greater potential for client retention than a premium service firm that requires a lot of hand-holding and evening calls from clients, making the lower-end practice command a greater price.
6. in some situations the buyer’s motive in acquiring a tax preparation practice is to have access to the clients to pitch them to sell annuities. those buyers would pay much more than someone who wants to continue doing the tax returns. a caution here is to understand the motive of the buyer. most transfers of practices to these buyers have higher percentages and greater down payments but extended retention guarantees, and many of these clients are dropped or lost before the  expiration of the guarantee period.
7. the gross used could be the prior year’s gross…
8. or this year’s projected gross…
9. or the gross for the 12-month period through the end of the month before the sale.
10. another measure could be a base created by the actual collections for work done during first year of the new owner.
11. another method is payments of 20 percent of gross collections for work done during the five-year payout period. there would be no guarantees but the seller would share in fee increases to the clients the buyer retained.

there are other factors determining the value and price such as down payment, payment terms, tax characterization of the payments, guarantees, location of practice, staff retention, and ability and desire of buyers to make the payments. other reasons could be the buyer wanting to have a base so they could start their own practice and not have to do it from scratch, or a buyer wanting to acquire critical mass or clients in an industry they want to use as a springboard to grow in.

posted on november 9, 2020