Your Practice is not the Second Coming of Snapchat!

Last week, I read - with a high degree of incredulity I might add - that the 20-something founder of the Snapchat website was offered $3 billion to sell the portal and its application to the powers that be at Facebook. Now that mind-boggling offer was not in stock, but rather an all-cash deal  of a 3, followed by nine zeros, ready for deposit at any institution large enough to handle it.

And he turned it down.

Let me repeat that for emphasis. He turned the offer down.

Now this is a three-year-old website that has generated exactly NO revenues since its inception. None, nada, nein, nyet. For those unfamiliar with Snapchat, its application “times out” pictures posted to the site for 10 seconds or less before they disappear – a handy relief for those embarrassingly uploaded morning-after selfies from a wild night before and safely out of view of college admissions offices and prospective employers.

Snapchat founder Evan Spiegel told the Wall Street Journal he thinks the company is capable of getting even more and was encouraged when a Chinese concern valued the company at an even more obscene $4 billion.

I mean how many yachts can one person possible water ski behind?

I’m not sure how you would value a company like that with no profits to speak of but with an obviously expanding user base. I’ll let far brighter minds than mine figure that out.

Which brings me to today’s topic and that being CPA firm valuations that are simply divorced from reality. We like to say here that the three most frequent questions posed to us with regard to firm valuations are “What’s the multiple? What’s the multiple? And what’s the multiple?

And it’s stunning to learn how many firm owners still don’t get it. Like the $200K-plus tax practice in a farming community who decided that his firm was worth a multiple of between 1.3 and 1.5, a value I told him that he could not command if his firm was in New York City or Chicago, let alone one that sat adjacent to an odorous cow pasture.

And trust me; he’s far from the only owner who performed their best impression of Inspector Clouseau when it came to determining the value of their practices.

There are a number of variables used in determining the value of a firm – cash upfront if any, the length of the client retention period, length of the payout and profitability – and by the way, not the seller’s,  but rather the buyer’s.

Currently, it’s a seller’s market, but there are already shifts in the landscape that indicate that may change radically sooner rather than later. The most telling could be in fact that multiples overall are dropping even from their levels of just two to three years ago.

But still there are those out there who are just waiting for the Facebooks of the world to wave a large check in front of them before they hand over the keys. Believe me you will be waiting a long time unless your firm suddenly becomes as in demand as Snapchat.

And those keeping score at home, no, I’ve never availed myself of Snapchat. I guess my personal life is far too uneventful to worry about a viral snapshot of me doing the Macarena wearing a lampshade.