How is a Virtual Accounting Firm Valued

Speaker 1: If your specialty … Does this also apply if you’re are virtual firm? Have you seen interesting multiples, you know those one, one point two; for maybe traditional firms trying to maybe buy or acquire, or vice versa? Virtual firms to expose or extend their footprint.

Speaker 2: To be honest, virtual firms are probably a product of the last ten years, and certainly ushered in by the voluminous amounts of cloud applications that are available. Like you know, you could walk into your local Starbucks and probably see people who have started their own accounting firms there. So that’s a relatively new phenomenon. I wonder if what’s going on today in the M & A arena, is a problem with succession. And people haven’t planned for succession, you’ve got older partners and no talent on your bench to replace them. Whereas, a virtual firm usually they’re the young up and comers, they’re very sophisticated IT. Succession’s not a huge problem with them at this point, for the most part. So we’re not really seeing that much of a traditional firm versus merging in with a virtual firm. But what I will say, is with the sort of evolution of cloud software it’s making it much easier for firms to open satellite locations. Where maybe they’re not necessarily burdened with the expense of bricks and mortar, and overhead that a traditional office space would command.

Speaker 1: Yeah and it feels like for those, and correct me if I’m wrong, that maybe don’t have the succession planning; They view selling their firm as a way out. But then I imagine if you go done that path, that multiple is going to be shockingly low; Because if you don’t have the talent and systems in place, then the multiple or the value of what the asset that they acquire, is actually purchasing, is dropped dramatically. So is that a common mistake you see? Maybe the sole proprietor or the one partner firm, they’re like, “Well I don’t really know of anybody that can take it on, I’m going to try to sell it.” And then they’re shocked, both at; Hey this is a longer time line to actually do this; Or if you want to speed it up, the multiple that you thought you would get is significantly less than what you thought it’d be.

Speaker 2: Well and that’s a good point, but it addresses a larger problem; is that many people wait too long to start planning for succession. Ideally people should start planning for succession at least five to seven years before they want to slow down. Now that may seem like a long time, but again, with the evolution of technology we may email our clients everyday, we may call them, we may text them, whatever. But how many times are those clients actually in your office face to face? For many, many firms in the country its probably just once a year, and that’s at tax time. So if you’re going to slow down, say from full-time work in five years; when you think about it, that’s really only five client visits from most of your client base. So it’s pertinent to start planning succession early. Find the successor firm, and this way five years gives a nice timeline for that seamless transition. Because in the end it’s all about client retention; because if an accounting firm looses it’s client base you basically have a lot of empty offices and computers. Your client base, exhibit A, is the real tangible value of your accounting firm.