Firm Mergers: Why the Multiple Isn't the Right Focus

When pricing the transaction, it becomes all too easy to focus on price as a percentage of the most recent revenues. As almost every CPA knows, except in the rarest of circumstances, the agreed upon price is not the final price. The multiple, or percentage of revenues, is a subjective number based on the following factors:

The profitability of the transaction to the buyer.
The degree of synergy between the firms. i.e., Does the buyer want to open an office in the city where the seller is located or does the buyer have practice specialties the seller covets?
The terms of the deal: the longer the payout period, the lower the price or multiple
Client or industry concentrations
Recurrence of revenues

The most successful deals are those which exhibit a compelling synergy between the two firms. In those cases, the seller typically ends up receiving much more than the nominal negotiated price of the transaction because of additional services offered to the seller’s clients and higher seller profitability due to leveraging lower level staff post merger.