Practice Merger
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Non-professional businesses tend to be valued, for the purposes of purchase, sale or practice merger transactions, on the basis of their underlying profitability. The capital value of a business is generally expressed as a multiple of perceived sustainable profits, so that an annual stream of net income is thereby converted into an equivalent capital sum.
On average, private companies are sold for between four to six times sustainable profit before tax when dealing in a practice merger. Higher multiples will apply where the existing business is regarded as very secure and, or there are realistic growth prospects. Lower multiples will apply where current profitability and profit prospects are less secure in a practice merger. Similarly, multiples will tend to increase as interest rates, and alternative yields, decline, and will tend to decrease as interest rates rise.
Goodwill represents the difference between the overall business valuation, arrived at on the foregoing basis, and the aggregate book value of the individual net assets carried in the balance sheet. To obtain a detailed analysis of the differences between the valuation of the practice merger in commercial businesses and accounting firms, you may purchase a copy of our Practice Valuation thesis from the APMA website.