No this is not a rhetorical question, but one that I am asked regularly. With many practitioners reaching their retirement age (often past the normal retirement age due to poor planning), I am often asked either by them or by people looking to buy their fees or practices what an accounting fee is worth. The answer is simply “it depends”.
What a fee is worth is based on a lot of different factors, but some of them that you need to take into account are the following:
1 Where the fee or practice is based: A small provincial town is likely to see less value than a large city simply because of supply and demand, i.e. there are more people looking to buy fees in big cities than there are in many small provincial towns.
2 The relative age of the clients: If the clients are all the same age as the retiring practitioner, i.e. well over 65, the life expectancy of those clients in an economic sense is going to be less than a more disbursed and average age bracket.
3 The average fee per tax return: While not totally reliable, this gives a good understanding of whether a practitioner is actually charging too much or too little for the services they provide. Sadly it is often too little. Last month I had lunch with a practitioner who told me he filed 450 tax returns per year, but his gross fees were only $300,000. Given that many of those tax returns involved preparing sets of accounts, it is very easy to see that he was under charging, particularly as he was in Auckland.
4 What the terms of the sale are: While in Auckland I work on a range between 50c and 65c in the dollar for fees as a starting guide only, which may be less than other cities, you then need to look at what the terms of the deal are. At the shorter end of that at around 50c it will typically be a take and pay arrangement whereby fees are sold and you pay for them regardless of whether they come across. At the higher end around 65c, it is more likely to be based on the fees that transfer and stick to the acquiring practitioner. This naturally therefore involves a time payment element either with or without interest.
5 Some commentators like Viv Brownrigg suggest that fees are worth 80c in the dollar. WHK for instance has been reported to have paid in excess of $1 for a $1 of fees. However, while I don’t disagree that there are some practices worth that much, I simply often cannot make the maths work on practices at that fee level. The reason is this, when you buy a fee you buy a future income stream. That future income stream, after the relevant costs are deducted needs to generate enough profit to pay off the cost of acquiring it after tax, as well as to provide an economic return before it is likely to end. In the insurance industry as a comparison commission renewals are generally sold at around 5-7 times the annual renewal fee. This means that there is an expectation that the clients last significantly longer than 5-7 years so that the purchaser still gets an economic return out it.
6 If you end up paying more than a fee is worth, you are effectively either prepared to pay more because you can generate a greater profit out of it because it will add efficiencies to you, or alternatively you are paying for the opportunity to go and find new clients in the future. You are really paying the vendor of the other fees for this, and not recognising that it is your efforts that will generate the replacement fees.
7 The second problem with the analysis and comparison to WHK is that typically when a practice is sold to WHK, the vendor continues to work for them at greatly reduced ongoing salary levels. Often when the true economic analysis is done and a comparison is made to what the vendor practitioner was formerly earning, the true recovery is down under 50c in the dollar in many cases. Sadly many people hold out WHK as an oracle and to be their saviour in terms of what their practice value will be, but in recent years it has bought very few practices in New Zealand. It also has the habit of cherry picking the best practices in the local areas.
So what is a fee worth? It is worth what you are prepared to pay based on a fair, economic analysis.
As always, we are more than willing to sit down and talk with you about your options in terms of buying and selling fees and what a practice may be worth. Please call (+64 9 3071777) or email to discuss.