The Valuation of the Goodwill of Commercial Businesses
Why accountancy practices are valued differently from ordinary commercial businesses — updated for 2026
The concept and accounting treatment of goodwill has been debated for many years in the context of commercial valuations for corporate entities generally — businesses that are not professional practices. Non-professional businesses tend to be valued, for the purposes of a purchase, sale or merger, on the basis of their underlying profitability: the capital value of a business is generally expressed as a multiple of sustainable profit, converting an annual stream of income into an equivalent capital sum. On average, private companies change hands for somewhere between four and six times sustainable profit before tax. Higher multiples apply where the business is regarded as very secure and has realistic growth prospects; lower multiples apply where profitability and its prospects are less certain. Multiples also tend to move with interest rates and alternative yields — rising as rates fall, and falling as rates rise.
Goodwill, in this context, represents the difference between the overall business valuation arrived at on that basis and the aggregate book value of the individual net assets carried on the balance sheet.
Why accounting practices are valued differently
For professional partnerships in general, and accounting practices in particular, a different valuation convention applies: a methodology based on a multiple of turnover, rather than profit, which looks at first glance quite distinct from the commercial model above. It helps to understand why.
The first reason is the legal structure most practices operate under. Where a practice is a partnership, its accounts don’t include a charge for the partners’ own labour — which means those accounts overstate the true economic profit of the business, in a way a normal trading company’s accounts don’t.
The second reason is that the arithmetic driving a practice sale is comparatively simple. For a purchaser, the existing overheads of the practice are largely irrelevant, because they can be substantially varied once the transaction completes — the purchaser will run the acquired fees through their own cost base, not the vendor’s. Turnover and gross profit therefore matter more to a buyer’s decision than net profit does.
As a result, it’s become a widely accepted convention that the goodwill of a smaller accounting practice is valued by applying a multiple to sustainable turnover rather than sustainable profit — that is, the gross recurring fees from annual compliance work, plus non-recurring special fees where those can be shown to recur reliably enough to count as normal. This isn’t really a different valuation principle so much as a practical adaptation of the normal one, to fit the particular characteristics of a partnership. As a general rule of thumb, roughly one third profit after overheads can be earned on client fees, though this varies by practice.
Where the multiple sits
In A.P.M.A.’s experience across more than five decades of live transactions, the multiple applied to fees to determine practice value has typically sat in a range around 1.0x to 1.2x annual recurring fees, with strong competition among buyers, or a particularly profitable and well-run practice, able to command meaningfully more than that. That range has held reasonably steady over the years, though the bottom end has drifted with the prevailing economic climate from time to time — reflecting, among other things, how mobile clients are perceived to be, and how readily purchasers can obtain bank finance for larger acquisitions.
For illustration: a multiple of 1.0x fees, against a post-overhead profit margin of one third, is broadly equivalent to 3.0x profit for a trading enterprise — noticeably below the four-to-six-times range typical of a commercial business. We believe that discount reflects the fact that accounting-practice profit, as discussed above, is calculated before charging for partners’ own labour or a notional salary for it; once you account for that, the two valuation models are broadly consistent with one another.
What’s changed in recent years
A number of forces continue to shape practice values:
- Cost pressure and client attrition. Successive economic downturns, most recently the pandemic period, cost many firms a meaningful number of clients whose own businesses didn’t survive — and clients generally remain more cost-conscious than they were a generation ago.
- Rising compliance costs. Inflation and an expanding regulatory workload — GDPR, Making Tax Digital, anti-money-laundering obligations (which are themselves moving to a single FCA supervisor over the next few years), and periodic changes to the taxation of contractors — have all added to the cost of running a practice.
- More appetite for bolt-on fee volume. Rising cost pressure has, if anything, increased the appeal of acquiring additional fee volume to spread fixed overheads further, which has kept demand for blocks of fees strong.
- Tighter bank finance for larger deals. It remains harder to secure bank finance for the purchase of larger blocks of fees than smaller ones, which continues to make high multiples on bigger practices harder to achieve.
- Ongoing consolidation. A significant and continuing wave of consolidation — increasingly private-equity backed — has reshaped the market and pushed independent firms to differentiate themselves more clearly in order to compete.
The factors that move a specific valuation
Every valuation ultimately rests on the principle of a willing buyer and a willing seller at a given moment, but a long list of specific factors shifts where within (or beyond) the going range a practice actually lands, among them:
- Whether the goodwill is being valued as an outright sale of fees, as a going-concern sale of the whole practice, as a continuing partnership acquiring a departing partner’s share, or as an incoming partner buying a minority stake.
- Whether the fees can realistically be serviced from a distance without losing clients.
- The density of established practices already nearby, which affects demand.
- Any contingent liability in the office lease, and the level of existing payroll cost relative to turnover.
- Whether key staff are tied in with suitable non-competition terms.
- The size and shape of the client profile, and whether value-added services (financial planning, for example) offer scope for further development.
- Charge-out rates relative to the local norm, and whether time records show significant under-recoveries.
- Any history of PI claims, late-filing penalties, or issues arising from quality-assurance visits.
- The payment period the vendor is seeking, and the length of any clawback clause.
- How much investment a purchaser would need to make in upgrading systems, digitising processes, and building a visible presence online.
In summary
The valuation of goodwill in an accounting practice follows the same fundamental principles as commercial valuation generally, adapted for the particular way partnerships account for partners’ own labour and the relative unimportance of existing overheads to a purchaser. A long list of factors influences where any individual practice sits within the going range, which is why experienced judgement — rather than a mechanical formula — is what actually gets the valuation right. Ultimately, the main value in any accounting firm lies in its client base, and in the opportunity that base provides for earning future profit.
We believe that whenever a partnership goes through a significant change — and particularly on a dissolution — goodwill should be recognised as a real, valuable asset, and revalued, charged and credited to the partners accordingly.