3 Factors that Most Impact a Firm's Valuation

Hey 👋 - Brandon here.

Happy Saturday to 1,584 growth-minded accountants.

Here’s one growth tip for you and your firm.

Today’s issue takes less than 5 minutes to read.

Today I will share what I believe to be the three most important factors that impact a firm’s value.

These factors have been developed based on my conversations with owners looking to sell, owners looking to buy, and developing my own criteria as I begin to explore acquisitions.

No one factor is controlling, and there are many important factors that impact valuation.

But here are the three I believe most impact valuations:

Key Person Risk

This is arguably the biggest impact on valuation.

If you want to maximize value for your firm, you have to remove yourself first from client service and then from the day-to-day operations.

Acquirers don’t want to buy a client service job!

They want to buy an asset that they can add to their own platform. They don’t want to start preparing tax returns.

If you are an owner performing client service… I’m sorry to say but you are hurting the valuation of your equity.

You will maximize firm value if you can show an acquirer that all your clients and staff will stay on board post-acquisition because client service and day-to-day operations are not dependent on you.

Virtual Firm, Larger TAM

To be clear, I don’t think a virtual firm is inherently better or more valuable than a brick-and-mortar firm.

But a virtual firm can promise a larger TAM.

TAM = total addressable market.

A virtual firm can acquire clients anywhere in the country.

And hire talent regardless of location.

Acquirers place a premium on growth potential and optionality.

Repeatable Systems + Automation

Acquisitions are challenging.

They will be infinitely more challenging if the target firm lacks great systems and documentation of those systems.

Can you show work moving through your firm in a streamlined way and do you have the data to prove it?

Repeatable systems can scale.

They curb chaos and make it easier on the acquirer to step into your shoes.

That said, I don’t think it’s wise for the firm owner to spend significant time building systems.

Firm owners can spend their time in higher leverage areas across the firm.

But I do think you need to invest resources into systematizing every aspect of your firm.

We hired Olivia Look’s team @ The Automated Agency to help us automate our workflows and build custom applications for our team.

Her team can best serve firm owners who have systems/processes documented and are looking to automate workflow.

(I don’t get anything for sending you her way, I’m just a happy customer.)

That's all for this Saturday. See you next week.

Cheers,

Brandon