Has the Economy Affected Accounting Practice Values?

So, what do you think…has the current economy created an increase in accounting practice sales prices, a decrease, or have selling prices of accounting practices remained stable? Last week, a CPA interested in buying a practice I represent for sale shared with me that he would have paid 1.15 for the practice two years ago, but in the current economy all practices are selling for one times gross. Beside the obvious comfort of going to the one times gross myth (see my July 2009 post about this), I found this observation quite perplexing.

Perhaps I am confused or naïve, but I do not see the direct correlation between the economy and value. Looking at the larger picture, when I go to the grocery store, I do not see a reduction in the price of a gallon of milk. I certainly have not seen much decline in the price of a gallon of gas. When I look at the corporate world, many companies have increased in value and massively overvalued transactions continue to take place in the high-tech sector. In fact, I believe Google is doing so well it just paid all employees a 10% bonus.

Some equate practice sales with home sales, so let’s look at that idea. There has been a pretty significant downward shift in home values across the nation, in some regions more so than others, but the basis of this shift has been a huge upswing in supply and a decline in demand as the sub-prime lending market went through upheaval, foreclosures increased to record highs and home mortgages became harder to secure.

In the accounting industry, we have seen the reverse as demand is outpacing supply. Fewer practices are put on the market because, for many, retirement has been put off until more certain times. At the same time, we have seen an increase in buyers with the growth on two fronts: 1) practitioners exiting the larger public firms and private industry looking to get their ownership start through an acquisition; and 2) existing practice owners that have identified an acquisition as the best way to increase the bottom line in the current economy.

So, I find this CPA’s statement fascinating because we find that a practice that has maintained its revenue and profitability during the past two years, and now finds itself in a higher demand market, has higher value than it did prior to being tested, and proving strong and stable, through the worst economy our nation has seen in 80 years. A practice that has grown during this time, and many have, is certainly doing the right things during difficult times.

The reverse is true as well. If a practice is struggling and having a tough time in these economic times, then its value is going to decline…just as it would in any other economy.

The economy has had an impact on accounting practice sales. Some regions have been hard hit and practices in those regions have declined. Financing has become more difficult to secure.

However, I would suggest that if you are not willing to pay as much for a strong, stable practice today as you would have two years ago, then your sense of fear and risk in the current economy is out of sync with the facts and maybe you should not consider an acquisition until we find ourselves in a more certain economy.

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