Accounting practices are one of the many professional services firm that can be financed based on the business goodwill. Accountants operate businesses providing a range of services including taxation returns and compliance work, business advisory and taxation planning. They also provide book-keeping services and keep their clients updated with the latest in regulations from the ATO and other regulators.
Depending on the size of the firm, there are a number of way banks will provide finance to a practice.
For smaller firms, with 1 partner, the maximum debt usually available is a maximum of 50% of the annual fees generated by the firm, but it cannot be more than 2.5 times the EBITAPR.
“EBITAPR = Earnings Before Interest and Tax After Partner(s) Remuneration. i.e. Net profit before tax + interest + depreciation + amortisation + salaries and fees paid to partners – LESS standard professional remuneration”
Where there are between 2 and 20 partners in a firm, this amount can be up to 3.5 times the EBITAPR.
They key item here is ‘standard professional remuneration’. This amount provides an allowance for a ‘standard salary’ to employ an accountant.
Here is an example of a small firm. Let’s say the firm is generating $1M in fees, has one partner and has a profit of $200,000. This profit is after the partner draws out his salary of $170,000. By adding the $170,000 to the profit of $200,000 we have an EBITA of $370,000. But, we have to deduct the ‘standard Professional Remuneration’ to turn this number into EBITAPR. In a small firm, $100,000 could be expected to be a reasonable remuneration for an accountant. As such, we deduce $100,000 from the previously calculated $370,000, so $270,000.
We then multiply this by 2.5 times being $270,000 x 2.5 = $675,000. This is the amount available to this practice for borrowing purposes. The firm may with to borrow this to payout other partners or to purchase another accounting business.
