Valuing a Consulting Business

IMG_7725-003

 

There are probably hundreds of reasons why you might contemplate selling your consulting business. Among them would be retirement, changing markets, illness or just the urge to move on and do something new.

Who is the buyer?

The buyer will probably be another consultant – either a competitor or a firm with a desire to expand their offering to include your area of expertise. It is unlikely that there will be financiers, or others with no direct experience standing in line to buy your business. There is, however, a pretty good chance the buyer will be a partner or an employee, in which case you need to start talking to financial planners long before you expect to do the transaction.

What are they buying?

When you think of selling the business, you tend to think of it as just that… the business. When we start thinking about its value, though, it is a good idea to put ourselves in the buyer’s position. What specifically does the buyer hope to acquire?

–          Your client list / existing relationships.

–          Expertise in a new field, or the opportunity to serve a backlog of client demand.

–          Name and reputation.

–          An instant start in the business with a functioning team – it saves the time, energy and uncertainty of building the business from scratch… as long as the cost isn’t too high.

–          Ability to leverage your client base – the buyer can provide services from your business to his existing clients, or alternatively, sell new services to your current clients.

–          Owner to stay on through a transition period – to facilitate the smooth transfer of relationships, retention of staff, transfer of knowledge and expertise.

What is the price?

Consulting firms typically have relatively little in the way of assets, so one way or another, the selling price is likely to be a multiple of earnings or cash flow. EBITDA (earnings before interest, depreciation and amortization) is a traditional measurement of cash flow, but why not add back your salary and any special items such as health care and travel that could be considered personal, and would not be costs to the company after the sale? Also consider accounting, legal, insurance etc. costs that will go away after the acquisition.

The value of a single-person operation will probably be lower because of the impracticality of having the seller stay on through a transition period, and the higher risk of losing clients.

The purchase price will depend on the exact fit with the buyer’s business, and the time and cost of entering the field. Remember that if you ask too high a price, the buyer may decide to start the business from scratch, maybe even hiring your best employees away from you, and competing for your existing clients.

Rules of thumb – selling prices generally fall between 2.5 and 3.5 times earnings (high utilization rates and low costs will result in a higher value) OR .75 to 1.25 times gross revenue, which probably yields the same value, depending on your profit margins.

The purchase price will be higher if you stay on through a transition period. You would draw a salary, of course, and it doesn’t hurt to be there to keep an eye on your payout.

Payment Structure

You’ll get the highest price if it is paid out over time, say 2 – 3 years. An up-front payment in the range of 25% is common.

Remember that if a buyer pays 3 times earnings up front, he will get no return on his investment for 3 years, a situation that few investors can tolerate. Even if there are synergies that result in additional business, the buyer would probably have to lay out additional investment to realize them.

 

Do you know who to call if you need help selling your business?

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s