This is the number one question for just about everyone running a business. If I sell the business as a going concern, what is it worth? You can leap into an internet rabbit hole and start reading about complicated equations and multipliers affecting particular industries or professions. There are quite literally hundreds of ways of valuing a business, in particular law firms, that most of the figures that professional advisers come up with contradict others.
Accountancy firms are fairly simple – there tends to be a very easy valuation technique that works well for most and the industry seem to accept it as the norm. This is to calculate your gross recurring fees and multiply them by a factor, which tends to be around 1.2 at the time of writing this FAQ. This does very much depend on the quality of the gross recurring fees – obviously 300 recurring fees from clients aged 92 are not going to be worth as much as 300 recurring fees from clients aged 32!
Law firms unfortunately have no such easy solution when it comes to valuations. At varying times we are able to spot a trend – so recently there has been a tendency for sales to occur at around 50% of the most recent turnover, but this fluctuates and depends very much on the market conditions. Sometimes figures plummet to very little indeed, but we do usually recommend ignoring the copious articles available on the web advising sellers that their practices are not worth anything at all. If you look at who writes the articles it does tend to explain why someone would write this (the authors tend to be linked to buyers!).
Of course there is an old saying – valuation is vanity, sterling is sanity. Beware the business broker bearing gifts of ridiculously high valuations to flatter you into giving them business. We try to avoid valuing businesses for our clients – we would rather you start negotiations with buyers without indicating prices to them and see where discussions take you. This is the way to get deals going and we find time and again that sellers end up with sale prices higher than their expectations at the outset..