Occasionally we encounter owners of consulting firms who believe that developing a simulated valuation of their business is a meaningless exercise before taking their firm to market. Their position is that the only valuation that counts is whatever a buyer is prepared to pay.
We agree that the actual price paid in the transaction is indeed the only one that counts! However without a simulated valuation in advance, the price paid is more likely to be lower than it could have been. Or there could even be no sale at all because you entered a process wanting far more than the hungriest buyer would ever be prepared to pay.
So how is it possible to produce a credible simulated valuation and why does it matter?
Every firm we take to market starts with a valuation exercise that gives us a range – the worst case, best case and most likely outcome. We can do this because we know the M&A market for consulting firms and have a tried and tested methodology which looks at a business through the lens of the buyer.
It takes into account the financial performance, forecast and risk in the business, as well as the market conditions and prices comparable consultancies have achieved. We’re able to factor in the likely synergy value to the buyer groups that should be interested and the potential effect of buyers competing for your firm (depending on how hot your consulting sector or discipline is).
Now armed with a valuation, what are the benefits to you as a seller?
- By modeling the valuation range, we can identify where short term value enhancements can be made. If these weren’t addressed the sale price could be reduced before or during due diligence. As everyone wants to sell their business for the best price, it makes sense to get the business in the best possible shape before going to market.
- The development of the valuation provides good input to the strategy adopted in the sales process which increases the chances of taking the price up to a premium level or beyond.
- If you don’t have a view of the value of your business before you enter a sale process, you don’t know what good or bad looks like. Do you want the nagging feeling that you undersold your business when you later see competitors do exceptional deals? It could also be that you fail to strike a deal because of an inflated or unrealistic expectation.
As you can see in our annual M&A Report, the ‘typical’ firm sells for approximately one times its revenue. However every average comes with a range and in the consulting sector it’s a very wide range (anywhere between half and three times your revenue).
If you want to be towards the premium end of that range and achieve the best price for your consultancy, it’s important to be aware of what the market is likely to pay. By understanding the value of your business and remedying any weaknesses prior to going to market, you’re more likely to achieve a price that you’ll be delighted with.
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