Exploring market multiples accuracy for professional practices: sales is the value anchor but profitability and location matter too

In this study, we aim to address a serious gap in the otherwise rich value relevance literature around professional services firms. Such firms are generally recognised as making up a significant and distinct category within the contemporary economy. However, there is currently a notable absence in the value relevance studies on transactions around equity stakes for this sector. We address this issue and investigate the prediction accuracy of the sales multiple—commonly used as a valuation shortcut in the industry—and the value relevance of financial and non-financial information. We do so within the country-specific setting of private equity deals executed in Italy from 2012 to 2018 regarding small accounting practices (SAPs), which we deem of interest because they present similar characteristics to their European peers and because accounting firms are qualified in the management literature as 'classic' professional service providers. This exploratory study of 76 deals confirms the superior informative value and prediction accuracy of the sales multiple. We also ran a regression of transaction prices on several value drivers, identified consistently with prior studies and mainstream valuation theory. We thus found that some non-financial information specific to the context of SAP and certain deal characteristics are value relevant and complement financial information. An example of this is a firm's location in a small town. However, contrary to expectations, the age of a firm's owner was not found to be significant.