There are five factors that determine the valuation of an accounting firm:
- Client Roster: A well diversified customer base of over 500 to 600 small to midsize businesses raises an accounting firm’s valuation – in some cases up to 1 to 1.25 times the revenue.
- Service offerings: Accounting firms that offer a wide range of services like tax preparation, payroll management and consultation have a higher valuation than companies with a one-dimensional revenue model. Multiple revenue streams stabilize the business’s cash flow and can boost valuation to around 1.25 times the revenue.
- Accounts Receivables: Outstanding accounts receivables over 90 days hurts an accounting firm’s valuation (except if client list is primarily composed of blue-chip companies). Ideally, company should strive to keep it under 60 to 75 days.
- Client/revenue concentration: Ideally, an accounting firm should not have a single client account for more than 5 to 10 percent of the total revenues. A revenue model surrounding one client can seriously lower an accounting company’s valuation.
- Liability issues: Unlimited liabilities, INS violations while filing work visas for employees, and a lack luster D&B report can significantly affect a business’s valuation.