All accountants want to know “How much is my business worth”? The correct answer of course is “it all depends”.
To value a practice, we look at turnover, profitability, average client size, client proposition, team capability and motivation, location, previous claims, not to mention property, age profile of clients, age profile of team members and partners etc.
If we are able to create enough demand for an accounting firm, the rule of supply and demand dictates that the price will go up – irrespective of all the parameters affecting valuation. It is therefore 2020’s primary role in this field to create demand which is best achieved by contacting similar minded firms who are often 2020 members.
The recent trend for accountants to offer wealth management services has also raised the question about valuations. All the evidence indicates that the value of wealth management businesses is 3 or 4 times more than that of an accounting firm.
Why would a wealth management income stream attract a valuation of 3 or 4 times more than that of a traditional accounting firm income?
The answer, as we have mentioned, is simply through the equation of supply and demand.
There are currently many more buyers looking for wealth management businesses than there are businesses looking for accounting firms. There are now several ‘consolidators’ in the wealth management space who look to buy wealth businesses with a view to extracting maximum value from the business with payments over 24-36 months.
The establishment of a wealth management business on the side of an accountancy business will also makes the clients more loyal or ‘stickier’. It will turn a customer into a client or even an advocate, as the relationship evolves from the ‘transactional’ to the ‘relationship’ as more services are offered to the client. This must be the aim of any business to move the customer up the loyalty ladder.
Therefore, the optimal business acquisition now appears to be buying a wealth management business aligned with an accountancy firm – the trust associated with an accountancy firm and their clients attracts a vastly superior valuation than other professional businesses.
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