The Case of the Great Declining Multiples

Ah, the 1990s – Seinfeld, LA Law, Jurassic Park, Boyz II Men, Sega, Netscape and mobile phones the size of rugby balls. Some things from that era were to be treasured, others, like my pale blue “Members Only” jacket were eventually given to a clothing charity where I’m not sure they kept it.

In full disclosure I also owned a purple one that mysteriously disappeared from my closet. I always suspected my spouse but she has steadfastly remained loyal to her alibi of visiting her mother at the time.  I still find it strange that her mother lived in Florida and I don’t remember her absent for a week, but that’s fodder for another column or at least a segment of “Unsolved Mysteries.”

You know what else will most likely never return from that bygone era? Receiving high multiples for CPA firms.

Remember those halcyon days of consolidators such as American Express Tax & Business Services and Centerprise paying up to 1.75 when rolling up as many willing practices as they could handle? Well, nearly 20 years later those absurdly elevated values are more like prom corsages, pressed in a scrapbook and fondly remembered - something to show your kids and grandkids when you’re feeling nostalgic.

As I’ve stated before the three most frequently asked questions when a firm is entertaining a merger are: “What’s the multiple? What’s the multiple and what’s the multiple?”

The answer isn’t as smile-inducing as the above line.  While firms were routinely receiving as much as 1.5 even up to 5-7 years ago, today, depending on what part of the country you’re located, the most you can ever hope to see is in the vicinity of 1.2 – and that’s predicated on the fact your firm is sited in markets such as New York or Chicago.

Should you be looking for an external solution in a more rural area of the Midwest or the Great Plains states, the harsh reality is you’re looking at anything from .5 to .75.

With the millions of Baby Boomers exiting the workforce and the dearth of talent in the pipeline, it’s become a bona-fide buyer’s market and is likely to remain there for at least the ensuing five years or so. So, if you’re holding out a For Sale by Owner sign, you’d better be prepared for today’s valuations instead of expecting a multiple that you’ll never see anytime soon.

Or probably will ever again.

But if you’re feeling nostalgic there are always plenty of Seinfeld reruns – yadda, yadda, yadda.