Valuing professional practices
and Consultancy firms

Valuing professional practices and Consultancy firms

Professional practices include firms providing accountancy, legal services, engineering, architecture, veterinary services, advertising, market research and other technical services. Consultancy firms included businesses providing computer facilities management, software and or hardware services, software development and internet and web design services.

Professional practices and consultancy firms specialise and sell their expertise and often have little or no productive tangible asset base. Consequently,a substantial proportion of the practice value may sit with intangible assets. These intangible assets can include the assembled work force, the strength of the brand, the repeat business client base and customer contracts.

A key component in a valuing small to medium sized professional practices a professional practices is determining a market salary for the owner practitioner(s). This is particularly pertinent to valuing a smaller practice, where adjusting for a market salary may eliminate any profits available to an investor. Owner compensation is a key issue in court cases, see Corbon & Klousner (2015) and Scott & Scott (2006), an accounting practice and medical practice respectively.

Another key valuation component is the extent that the client relationships reside with the practitioner(s) and or consultant(s). If the practitioner(s) leaves are those relationships lost? Does the goodwill reside with the practice or with the practitioner(s)?

Valuers sometimes refer to rules of thumbs for valuing professional practices and consultancy firms, for example, eighty cents to a dollar twenty in the dollar of revenue for accounting practices. Rules of thumb, however, are exactly that, they are not a recognised valuation method but more a final sanity check.

Values of practices can vary significantly based on location, margins, the type of client base and the stability of the work force. For example, an international intellectual property law practice is likely to have a more stable and secure revenue stream compared to a personal injury firm operating on a no win no fee basis. Please see the link to valuing a legal practice for more details.

The hypothetical purchaser may influence value. For example, certain listed entities “roll up” small practices with the aim of reducing back-office costs. Listed companies often have lower costs of capital and so the value to a listed acquirer could be higher than with an individual practitioner.

Examples of professional practice and consultancy firm valuation engagements include the following:

• Valuation of a national maritime-orientated engineering and consulting service business providing marine and electrical engineering, naval architecture, systems engineering and risk management service to clients including commonwealth departments. Report prepared for the Australian Tax Office because of a transfer of ownership between related parties.
• Valuation of the equity held in a group of veterinary clinics required by the ATO to establish if shareholders eligible for scrip for scrip roll-over relief under Subdivision 124-M of the Income Tax Assessment Act and that the transfer values are substantially the same in accordance with subsection 124-780 (5) ITAA 199.
• Valuation of a national maritime-orientated engineering and consulting service business providing marine and electrical engineering, naval architecture, systems engineering and risk management service to clients including commonwealth departments. Report prepared for the Australian Tax Office because of a transfer of ownership between related parties.
• Valuation of a national engineering business providing electrical and project management services to the mining industry specialising in screening and processing; expert report prepared for the trustee of the bankrupt estate.
• Valuation of a mid-sized accounting practice; valuation required for a partner dispute and potentially for refinancing purposes.
• Valuation of a legal practice, for valuing the shares of exiting partners.