Venturing Beyond the Rule of Thumb in the Valuation of Small Accounting Practices: An Exploration in the Italian Market

Abstract

The study explores the prediction accuracy of a P/Sales multiple – derived from the regression of transaction values on value drivers identified consistently with prior studies – in the highly standardized and homogenous context of the transfer of Small Accounting Practices. We find that the regressed P/Sales multiple significantly outperforms other multiples – often adopted as rule of thumb valuation metrics in the industry – such as simple industry harmonic-averaged P/Sales or P/EBITDA. The median absolute error is 4.70% for the regressed multiple vs 11.30% for the best alternative metric (P/Sales harmonic mean).

Moreover, we observe that non-financial information specific to the context of Small Accounting Practices, namely the location in big cities, is value relevant and complements financial and deal characteristics information.

Keywords: value, prediction accuracy, value relevance, small accounting practices, private equity

JEL Classification: M21, M41, G32, G34