How to Value a Tax Preparation Business
Tax preparation businesses provide various tax-related services to individuals and businesses. This may include tax return preparation, tax planning, income tax filing, etc… As such, the tax preparation industry retains steady demand during tax season. According to IBIS World, this industry generates over $2 billion dollars per year. The tax preparation industry also has very healthy profit margins. As such, buying, expanding, or selling a tax preparation business can be lucrative. However, demand for tax preparation services can fluctuate each year. This presents challenges for tax preparation businesses outside of tax season. As such, it is beneficial to learn how to value a tax preparation business. This can help you understand how to increase the demand for your services throughout the year.
To learn how to value a tax preparation business, consider receiving a business appraisal. In addition, receiving a business appraisal can help you understand how to maximize the value of a tax preparation business. This can help you succeed whether you are buying or selling a tax preparation business.
Peak Business Valuation is here to help! Peak is a professional business appraiser that works with tax preparation businesses regularly. We can provide you with a business appraisal and discuss any questions about how to value a tax preparation business. You can start today by scheduling a free consultation!
How to Value a Tax Preparation Business
There are various valuation approaches to value a tax preparation business. At Peak Business Valuation, our analysts often use the market approach and/or the income approach. The approach a business appraiser uses depends on various factors. This often includes the size of the business, the business transaction, the reason for the valuation, etc… As part of a business valuation, an appraiser considers these factors to determine which method is best for your tax preparation business. This can include using a combination of valuation approaches to value a tax preparation business.
Valuing a Tax Preparation Business Using the Market Approach
To understand the market approach, consider the real estate appraisal process. When a real estate appraiser values a home, they assess similar properties that recently sold in the area. This helps them determine an appropriate value of a home. When a business appraiser uses the market approach, they assess similar tax preparation businesses that recently sold on the market. If the tax preparation business is private, the expert refers to private transaction databases.
Multiples for a Tax Preparation Business
When using the market approach for valuing a tax preparation business, business appraisers rely on valuation multiples. These are ratios that assess the value of a business based on various financial metrics. This often includes cash flow, earnings, or sales. To find the valuation multiples for a tax preparation business, analysts use the proper NAICS or SIC code. Below, we highlight basic valuation multiples for a tax preparation business.
SDE (Seller’s Discretionary Earnings) Multiples for a Tax Preparation Business
- SDE multiples are popular when valuing a tax preparation business. The SDE multiple determines a tax preparation business’s value in relation to its seller’s discretionary earnings.
EBITDA Multiples for a Tax Preparation Business
- EBITDA multiples help calculate the return on investment (ROI) a tax preparation business can expect.
REVENUE or SALES Multiples for a Tax Preparation Business
- REVENUE multiples measure the value of a tax preparation business in relation to its total sales.
There are various factors that determine which valuation multiple a business appraiser uses when deciding how to value a tax preparation business. To learn more about multiples, see Valuation Multiples for a Tax Preparation Business.
Valuing a Tax Preparation Business Using the Income Approach
The income approach is another valuation method that calculates a business’s value by assessing its cash flow potential. The income approach also considers any risks that a buyer may encounter. Below, we discuss a few risks associated with buying, expanding, or selling a tax preparation business.
- Client Relationships: Having strong client relationships promotes steady cash flow and profitability. Consider ways to strengthen your reputation and client relationships.
- Competition: The tax preparation industry is very competitive. It is important to differentiate from competitors, especially those near you.
- Fluctuating Demand: Tax season only happens once a year. As such, demand for tax preparation services tends to fluctuate each year.
- Regulatory Compliance: Tax regulations can change frequently. To operate, it is crucial to be aware of the current tax regulations.
Methods to Value a Tax Preparation Business Using the Income Approach
The income approach comprises several methods for valuing a tax preparation business. Two popular methods under the income approach are the capitalization of cash flow method and the discounted cash flow method. Both of these income approaches measure the cash flow potential of a tax preparation business. We highlight how to value a tax preparation business using these valuation methods in the following paragraphs.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is ideal for tax preparation businesses with a long and stable history. This method involves determining an appropriate measure of economic income for a specific period. This period of income is then divided by a capitalization rate. The capitalization rate represents the rate of return an investor can expect from a tax preparation business. In addition, the capitalization of cash flow method considers the risks associated with a tax preparation business. We highlight a few of these risks above.
Discounted Cash Flow Method
- Business appraisers generally use the discounted cash flow method for tax preparation businesses with strong financial histories. This method is also ideal for tax preparation businesses with reliable forecasts. The discounted cash flow method relies on 3-5 years of cash flow projections. These future earnings are then divided by a discount rate rather than a capitalization rate. This process calculates the present value of a tax preparation business. Keep in mind, this method is less common since it relies on future cash flow projections which can be inaccurate.
Summary
Valuation experts may use a variety of valuation approaches to determine the value of a tax preparation business. Often, Peak Business Valuation uses the market approach and/or the income approach when valuing a tax preparation business. These are both effective approaches that provide different interpretations of the value of a tax preparation business. The method the appraiser uses depends on various factors. To know which method is best for your tax preparation business, receive a business appraisal. This is important whether you are buying, expanding, or selling a tax preparation business.
Peak Business Valuation, business appraiser, works with many tax preparation businesses across the nation. We are happy to provide you with a business appraisal for a tax preparation business. In addition, we welcome any inquiries on how to value a tax preparation business. Schedule your free consultation with Peak Business Valuation below!
Valuing a Tax Preparation Business, Valuation Multiples for a Tax Preparation Business, and Value Drivers for a Tax Preparation Business.
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