To the uninformed it seems implausible that a consulting firm could have hardly any value at all. After all, these are knowledge based ‘people businesses’. How does a buyer place a value on an asset that could evaporate if everyone leaves the day after a deal is signed?
Whatever your business model, whether it’s pure consulting or otherwise, the likelihood is that there is insufficient tangible value to be found in your P&L or balance sheet. It’s the inclusion of the intangible assets that provide this value and they can’t be found in any financial statement.
The only way a buyer is going to pay a premium price for your business, is if these intangibles are converted into confidence and belief that the next 3 years provide almost guaranteed growth.
Firms that inspire this confidence can cite 7 clear drivers of sustainable growth, underpinned with facts and data.
1. We know exactly who our strategic clients are
Do you know the ideal profile of the companies in your target market(s) where you have the greatest right to win against the competition?
If so, your buyer can then get excited about your focus, how he can take you and your IP into his clients that look the same, leverage your capabilities and increase fee income per client.
2. Here’s the rate of penetration to date and space we can fill
Have you built and maintained a database of current and potential strategic clients covering the entire addressable market?
Your knowledge of target market size and current penetration will demonstrate how you’ve scaled so far by design. A buyer can see year by year penetration rates, win rates and how that’s improved. He can also understand the white space left to fill into the future.
3. This is our database of decision makers and relationship growth
Have you researched and populated your database with a dataset of contacts comprising the decision makers and influencers in each target client?
A buyer will be able to take this data and understand how you have sold to and grown accounts. He will see that not only have you acquired great strategic clients, but you have both the data and relationships to continue the momentum.
4. Here’s how our UVP is growing our average engagement size
Are you selling a Unique Value Proposition that appeals to decision makers with big business problems and deep pockets?
If so, your buyer will be able to see how you’ve grown your UVP over time, resulting in very attractive engagement sizes he wants to replicate across the globe.
5. This is our growth and retention rate by strategic client
Are you very sticky to your clients, relationships last a long time and lifetime fee income per client is growing?
In an ideal world it would be a great asset to show 3 year contracted business to buyers, however in the real world the next best thing is to show client sell-on growth and long term retention rates. Buyers of consulting firms treat this as a proxy for contracted business and recurring revenues, suitably discounted, but still a big asset.
6. Look at our historic and future scale plan into adjacent spaces
Have you moved from cell to cell in your service/market matrix, by filling only the adjacent spaces symbiotically from your core?
When the buyer sees this picture, he can see not only the quality of your strategy, but also salivate over the blank canvas of white space to fill, once his brand and coverage is added to your capabilities.
7. Look at our historic forecast accuracy
Has your 12 month revenue forecast been honed over time into a reliable view of reality, with a margin of error to +\- 20%?
When you present your business to a buyer, no matter how well you’ve performed historically, he will treat your forecast with extreme caution. However when you show him the forecast data alongside all the imperatives above, his belief in the future will soar.
The only way a buyer will gamble on a high risk firm is if he mitigates his risk by paying a very low price up front and/or an earn-out highly contingent upon future results. However he will pay a premium for a firm that looks like a rock solid financial risk, irrespective of synergy value, which will drive the price up even further, increase the up-front payment and alleviate earn-out terms.
These drivers are embedded within the Equity Growth Wheel, the model that enables firms to both evaluate current valuation and growth risk, plus an execution plan for performance improvement to sale readiness and exit. If you’d like to confidentially discuss your particular situation, please let us know and we’d be happy to help.
this blog is the condensed version of an in-depth article on this topic which you can access here.
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