Perfect Numbers

I have been selling and valuing legal practices for 15 years. During that time I have analysed the financial statements of literally hundreds of firms. When someone asks me questions such as how much rent should I be paying? How much should I pay my staff? What is a reasonable level of earnings? I can usually respond without too much difficulty. For example, how much can I afford in occupancy costs? I will answer that the most common range is 5% to 10% of revenue per annum. Therefore, if your annual revenue is $400K then, according to these percentages, occupancy costs would be $20K to $40K per annum. There are nuances to this. Outside of metropolitan areas it would usually be 5% or less. In prestige offices in the CBD it would be closer to 10%. That doesn't mean that you should sit back and relax if your occupancy costs are 7.5%. There is no harm in finding a way to put another 2.5% in your pocket, instead of the landlord's. However knowing benchmarks is helpful in your planning and budgeting. You would think that when selling a practice, nothing is more important than the level of profit. Actually, the level of revenue is usually a lot more important. Various expenses, such as rent, become major factors when a buyer is unable to make changes to expenses in line with their own earnings objectives. If the practice was stuck in a long uneconomic lease then this would reduce the value of the practice. Expenses are relevant to practice buyers in terms of where they are on the scale of normal benchmarks and whether there are any impediments to fine tune the expenses. Becoming familiar with benchmarks will make the process of buying a practice a more methodical and logical exercise.