I have been thinking merging or selling my practice. How do I determine what my practice is worth?
You might want to consider retaining the services of outside advisors to help you with this process. There are a variety of methods used to value law practices including:
- Fair Market Value Methods
- Rule of Thumb Methods
- Price Earnings Ratio
- Discounted Cash Flow Models, etc.
CPA practices are often valued using a rule of thumb method employing a multiplier of 1.0 to 1.5 times average gross revenues for the past five years. Thus, a practice with average billings of $400,000.00 per year might sell for $600,000 with 50% of the purchase price paid upon closing and the balance (50%) paid over a five year period based upon subsequent collections.
Law practices are more difficult to value. CPA firms often have more repetitive work from ongoing clients and less risk in the practice - say compared to a personal injury law practice. CPA firms often have enforceable non-compete agreements which are non enforceable and therefore non existent in law firms. Law firms have much more fluctuation in practice valuation and no valuation model dominates. The rule of thumb model - when used - ranges from .5 to 3.0% - and will dependent upon the amount of repeat business, extent of institutional vs indivdiual clients, and the ability to sucessfully transfer clients to the acquiring practice.
Look for ways to institutionalize your practice in a way that your practice is not "uniquely you."
John W. Olmstead, MBA, Ph.D, CMC