by Tony Vidler
Creating great capital value for a professional services firm is usually one of the owners primary objectives as they more often than not see their business value as a critical part of their own financial independence.
Building a profitable business is obviously essential, and it is a more valuable profitable business if a large proportion of the revenue carries certainty of continuity for any prospective purchaser. Pretty much everyone gets that of course, hence the emphasis upon growing renewal commission income or setting ongoing fee for service or advice contracts with clients.
That’s the first key lever that ratchets up the capital value of a firm: predictable revenue.
The more certain a future income stream appears to be, the more highly it is generally valued by an investor. A firm which is dependent for its revenue upon the key sales skills of a handful of rainmakers just doesn’t have the same predictability in future revenue as one where clients hold ongoing contracts for service with the firm for example.
The second big lever is dependable experience. The client experience with the firm in terms of the type of advice or service they receive, and the consistency with which it is delivered, the positioning and branding of every client interaction creates certainty for the clients. In certainty there is familiarity, which leads to trust and a consistent feeling of expectations being met. That homogeneous client experience leads to higher retention of clients, and if done well it also leads to higher ongoing participation by clients in the firms services. So dependability delivers clients who will stay longer and also do more business with the firm. THAT is worth paying a bit more for if one is buying a firm, right?
How transferable is the firm? If extracting the capital value to fund the current owners retirement is an objective, then one of the key valuation considerations must be “how easy is it for someone else to step in and run this business and gain the expected business performance?”
Staff contracts and culture, IT and client management systems, advice or service systems, prospecting and marketing methodologies….these are all examples of the areas where significant roadblocks (or value detractors) can lie….or where major enhancements to capital value of the practice can be created. Smart business purchasers will give some serious consideration to the ease of transfer of ownership, or integration into another business, and their view of the value of the firm will be adjusted accordingly.
The last of the big levers driving higher value for professional services firms is whether the business has the potential to be repeatable. Not all business purchasers actually want a practice which can expand into multiple locations or markets of course, but the ability for systems and intellectual property to be duplicated and repeated elsewhere is attractive to a purchaser. Often we have seen institutional buyers of advice practices over the years, and it is this 4th key lever which often drives the transaction. The ability to take a successful set of systems and apply them across other business units can be the most valuable capital element in a professional services firm.
If a practitioner were to build all 4 of these into their firm there is little doubt that the firm will be far more attractive to potential purchasers, and attract far greater valuation multiples than the atypical practice.