Growing equity value webinar series: Market proposition

Close up of businessman holding graph in palms

Lately, we’ve been running a series of free 30-minute webinars to help attendees grow the equity value in their consultancy firms and prepare for a sale of their business. Attendees at each webinar submit questions, and we’re going to be sharing and answering these questions in a series of blog posts. This week we’re looking at the questions asked during the webinar on what you need to know to attract the right clients and buyers.

1. How would a specialized consultancy firm, such as a law firm, go about quantifying its unique value proposition (UVP)?

The UVP has to answer the question ‘why should I buy from you?’ so start thinking about ways you’re differentiated from your competitors along industry, geography and services lines. In terms of industry, perhaps you focus on one or two industries and are recognised experts in say, construction law, or oil & gas exploration. In terms of your geography perhaps you’re able to offer international clients representation in their major jurisdictions. And in the case of your services think about what might set you apart, perhaps you use technology to automate low value-add services so that your clients pay Lawyers for the work only they can do, or perhaps your firm offers a flexible fee structure, or ‘subscription pricing’ for a steady stream of work, or even fixed fees when you know you can leverage your own IP and juniors while still maintaining quality.

As to quantification, think about the way a prospect can relate to the benefits and therefore what kind of quantification is meaningful. What’s the pain point that gives rise to the need for your service, and how will that situation be improved by using your services? List out all the benefits, quantitative and qualitative then get some feedback from your current clients about the relative priorities. And on that point, the process for developing a UVP should start by looking at what you’ve successfully sold in the past, then inviting your clients to give you the unvarnished truth about why they chose you and the benefits they received. And if that conversation isn’t as comfortable as you’d like, well, all the more reason to do the exercise!

You can read more about the power of a UVP for consulting firms here.

2. When looking to attract new clients, is it better to emphasize the benefit of the services provided or demonstrate the firm’s technical competence?

While doing both is important in the sales process, it is important to prioritize the emphasis on the benefit of the services when speaking to prospects because you will have plenty of time to demonstrate your technical competence at a later stage in the process. When approaching potential clients, they are very interested in finding out the benefits of using your products and services as opposed to your competitors.

So, you must first outline the benefits of your services to clients, and then reassure them that you have the technical competence to deliver these outcomes.

3. Should we have a UVP for each service offering or just one for the whole company?

We advise you to do both. You need to have an overarching UVP for the company and then one for each service you offer. This is because there is a process of attracting, nurturing and converting prospects, which move from the broader lens of the firm, and zooms in on the individual services your firm provides.

For more information on why it is important to focus on clients with the specific needs your UVP addresses, read our blog on the importance of focus for consultancy success.

Finally, as with all of our webinars in this series, our key takeout is presented in our Start, Stop and Continue strategies. To immediately improve your market proposition in your consultancy:

Start: Explain in three jargon-free sentences what you do, and the benefits you deliver

Stop: Putting your technical expertise at the start of your sales messages

Continue: Creating content that showcases the benefits of your services (e.g. videos, articles, case studies)

To sign up to listen to a recording of this webinar, please click here. To view other webinars in the series, please click here.

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How an international office expansion may risk equity value

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Expanding your consultancy business and opening new offices abroad can seem an attractive proposition, however, it’s advisable to proceed with extreme caution. It’s important to consider the significant equity value and financial instability associated with such a move. If your consultancy is smaller than $10m, a failed international expansion can be catastrophic or make your business unsellable. While there are several sound strategic reasons for expanding overseas, those looking to grow value and realize equity must consider an overseas expansion through this lens.

There are often two assumed benefits made by consultancy owners when thinking about expanding overseas:

  1. The business will grow faster by selling current services into a new market
  2. The consultancy’s M&A position and attractiveness to strategy buyers or investors will improve, or at least not be impaired by such a move

The first point suggests that the business will grow faster and be more profitable, but is this true and is the timing right? The business owners may sense that the business has hit a growth ceiling in the home market, or the business is experiencing sufficient demand in other markets, but when digging deeper this is often not the case.

For instance, has the business really reached a glass ceiling or is it flat lining because there isn’t a disciplined approach to client acquisition? Or is the current sales and marketing process simply inadequate to drive growth?

If you are attracting prospective clients across borders, then consider the distraction; the cash flow commitment of setting up shop to cater to new markets is significant. To lessen these risks, make sure that the business is making enough profit in these markets before committing to a move.

The second assumption – that moving abroad will attract greater M&A demand and a higher equity value – is by no means certain. Buyers in the consulting M&A market acquire for a wide range of strategic reasons. Yet most buyers will focus on acquiring consultancies with deep domain expertise and intellectual property that can be leveraged (see our Buyers Research Report). Tight geographic focus is a key factor, but not necessarily a deal breaker either; top tier buyers, those with the deepest pockets, already have an international footprint and might not see the value in a consultancy that is spreading itself across borders.

This doesn’t mean that SME firms cannot be attractive or valuable if they are international. There may be a buyer out there for whom you are a perfect fit. However, it is generally true that the buying market will be more limited.

So, think very carefully about the risks of opening up an office in a new country for business growth and development purposes. SME consulting firms operating out of multiple countries will appeal to a more limited acquisition market than those with niche capability in a single growth market.

It’s important to consider the implications of international expansion against your M&A market positioning, in conjunction with your value growth plans and target time to sell.

If you’d like to read more about the equity value risks in international office expansion, please read the full article here.

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The importance of focus for consultancy success


Where a consultancy looks for revenue is an indication of the level of focus. This is best done by identifying and focusing on a particular group of people or organizations with specified needs that your proposition addresses (a ‘needs group’). A needs group is often defined by a particular industry or sector and it is usually the case that a consultancy is easier to sell if it has a specific industry focus. However, the needs group could be industry independent, for example you may target senior executives requiring leadership training across different sectors.

Focusing on specific needs groups simplifies and clarifies where marketing activity is directed, intellectual property is developed and expertise deepened. A consultancy that has a razor-sharp focus will look for business within a specific needs group and will not market outside that group. By concentrating on work where you have a ‘right to win’, there is more likelihood of winning the work and by only taking on work that aligns with the strategic aims of the business, the value of the business is more likely to increase.

In all needs groups there are issues that have been established for some time; there are current topics which are hot and need to be addressed quickly; and there are future trends which are just emerging and which will require action soon. A weak proposition will be perceived by clients as being generic and not focused on their specific needs. A base level proposition will be seen as addressing well-established needs; an advanced proposition will address current hot topics; and a more advanced proposition will also address emerging trends. The most valuable proposition of all will lead clients to perceive the business as being the thought-leaders for their needs group and the go-to experts.

An example of a proposition indicating underlying thought leadership and specific expertise might be the ability to facilitate regulatory-driven change in the banking sector, requiring deep sector knowledge and specific knowledge of the regulatory impact, in addition to the broader ability to implement change.

If you are a start-up consultancy, it is not unusual for you to take work wherever you can get it – you have to eat! As the business grows, however, it becomes increasingly important to develop focus in order to drive growth and maximize attractiveness to future buyers.

It is worth regularly reviewing your consultancy’s focus to ensure that you are concentrating efforts on the clients and sectors where you have the most right to win. Effort spread too thinly will lead to your offer being less attractive to both clients and potential consultancy buyers.

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The world is now ‘on demand’, but why are so many back offices still living in the past?

Blog photo back officefinalll

This week we have a guest blog from Mark Robinson, who has founded and sold several consultancies. His latest venture is professional services automation specialist, Kimble Applications, of which he is a co-founder.

Twenty or 30 years ago we organized our lives around how the world worked. We worked 9-5 because we had to be in the office to get work done, we sat down to watch a certain TV show at a certain time because that was the only chance we’d have to view it and we picked up a paper in the morning to get our news fix as that’s how we kept up with current events. That already seems like a long time ago now doesn’t it? These days we have flexible working, we can catch up on TV shows when and where it suits us and we can get a constant feed of news through our mobile phones. This has all been enabled through technology. But one area which has yet to embrace this new way of working is the back office.

Today, the back office is much the same as it’s been for decades. Invoicing is done at month end, as are payment runs and expenses, which are often physically uploaded, checked, approved and forwarded to finance. Resource planning is based on imperfect forecasting, often using a range of spreadsheets and a finger in the wind approach. Timesheets can take weeks to verify, leaving consultancy owners with little idea of how they are performing against budgets. This all adds up to challenges for any management team who wants to know how the business is doing at that exact point in time, as they have no idea how accurate or up to date the information they are using is. Imagine how much more quickly you could grow your consultancy if you had on demand information that showed you how the business was doing right then, allowing you to fix any problems much earlier and make decisions faster that improve your company performance.

That the back office is so behind is even more surprising given that we now accept that front offices need to function ‘on demand’. We know consultancies have to be responsive to clients’ requests and needs, so why are we leaving the back office wallowing in the past when they should be joined up with the front office and just as responsive?

The fact is that we now have the technology to make the back office on demand, which can bring huge benefits to consultancies. Rather than running a variety of untrustworthy spreadsheets or old fashioned packages, the correctly designed cloud application means that we can have a single, unifying system based around the processes the cloud enables into which we enter information as it happens and access from anywhere. This destroys the silos that previously existed between departments. From senior management, sales people, project managers, consultants and associates, every time anyone changed anything, the overall performance reporting would be updated across the system in real-time, so that whenever you looked at the information on the system, you know it’s completely accurate and a snapshot of where the business is at that time.

A client (or you, for that matter) wants to know what the status of a project is, how much time and money has been spent on it? They don’t have to wait until the next reporting run: you can tell them instantly. You’d be able to enter and approve expenses and timesheets from anywhere, at any time, and from any device. You’d know what capacity and skillsets you have on the bench at any given moment, and for how long, allowing better resource planning and pursuit of new business.

And alongside all of this, everyone in the business would have the same level or clarity meaning every employee understands how their actions can impact the business, empowering them to make a real difference to the growth of the consultancy.

And professional services automation (PSA) tools make a huge difference to the bottom line too. Invoices can be produced more quickly and are error-free, meaning they get paid more quickly, improving the company’s cashflow. Because much of the work is now automated, this frees up the back office to concentrate on more added-value work, meaning companies can grow without having to increase the headcount of non-revenue generating staff. Service Performance Insight is a global research, consulting and training organization dedicated to helping professional service organizations make quantum improvements in productivity and profit. Its last benchmark found that firms using PSA software saw more than a 6% increase in their billable resource utilization. On average, firms using PSA earned an extra $11,000 of revenue per consultant than those that have yet to adopt it and enjoy nearly 75% stronger profit margins as measured by EBITDA.

This technology is with us now. It’s time for consultancies to move their back offices from the past and into the on demand present. Just because it’s the way we’ve always done it, it doesn’t mean it’s the way we should continue to work.

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Does your consultancy have a real value proposition?

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A consultancy’s value proposition is a crucial component of its success. Are you selling only on the basis of your technical expertise or on the value you drive for your clients? The proposition describes the services you offer, such as IT implementation, strategy development or engineering design, for example. The value describes the results and benefits which clients obtain from using the services.

During our Equity Growth Accelerator (EGA) diagnostic we identify where a consultancy lies on the value-based proposition scale. At the lower end, there are resource-based propositions. These are offered and priced on the basis of the number of consultants deployed on the project. So called ‘time and materials’ projects are resource-based.

In the middle are value-based propositions, which are offered and priced on the basis of the predicted benefit to the client: the greater the value to the client, the higher the fee. Normally these propositions are fixed price and are not hard-wired to actual consulting effort.

At the upper end of the scale are gain-share propositions. These put some or all of the fees at risk, depending upon the delivery of agreed outcomes, and are structured in order to generate higher levels of fees than either resource-based or value-based. The element of risk associated with these propositions increases the unpredictability of the fees as well as the potential fee level. A typical gain share would see a proportion of savings, delivered by the project, being taken in fees by the consultancy.

Consider a supply chain consultancy working for a client to design and implement a new inventory management system. A resource-based approach would simply provide a number of consultants on an agreed day rate (or rates) and the fees would equate to the total number of days billed multiplied by the rates per day. A value-based approach would charge a fixed fee which the consultancy would price in proportion to the benefits they believed they would deliver which, in this case, could be the reduction in inventory costs that their client would enjoy at the end of the project. A gain-share approach would charge a lower fixed fee than the resource-based approach, plus a proportion of, say, the inventory savings that the project would deliver. Overall, the total fee for gain-share should be the highest of the three options.

There are benefits and drawbacks for each approach. When charging based on resource the consultancy is never ‘out of pocket’ as all days spent on the project will be billed. But its offering is more likely to be seen as a commodity and fees will consequently be lower and can come under even more pressure if rates can be readily compared with competitors. Furthermore, engagements may be easier to terminate by the client as the service is seen as paid for by the day (or hour). A resource-based approach may incur additional administrative costs if the client wishes to track – and possibly challenge – the time spent on the project.

Value-based charging can attract higher overall fees than resource-based and is light on administration. It enhances the status of the consultancy in the client’s view and provides longer term certainty of fees compared with both resource-based and gain-share. However, margins can be eroded if projects consume more consulting resource than estimated

Charging using the gain-share approach provides the opportunity for earning the highest possible fees and is easier to sell as the engagement represents a very low risk to the client. It also aligns the client and consulting goals. However, gain-share propositions carry with them the highest level of risk that the consultancy might lose money on programmes of work. Unless the benefits are very strongly linked to quantifiable metrics, and unless the criteria for benefit calculations are completely transparent, disputes over payments can easily arise.

If you can mitigate the risks of gain-share programmes then you will have the strongest propositions of all and the opportunity to really drive up revenues.

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Find a partner for the next phase of growth

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There’s a point in time in the lifecycle of many firms where the owners believe that their business has a great future with high growth potential, however they are equally convinced that they don’t have the firepower to take it to the next level. They are not looking for an exit, but a partner who can help them take the next step up while they remain in the business long term. What does it look like when this is your driver to sell? Typical feelings when this stage is reached may be any one, or a permutation of, the following:

• I’ve reached the limits of my business leadership capability
• We can’t get into bigger clients and million dollar engagements without a big brand behind us
• Our fees could grow exponentially if we had international client access
• Lack of investment is holding us back
• I’m at the next stage of my career having built my firm and now want to reach partner level in one of the Big 4

Ideally you will read these signals well in advance of your next growth glass ceiling, because if you allow business growth to stall, then the leverage you have with buyers or investors will decrease, along with the price they are willing to pay.

It’s by no means impossible to go into a sale process with flat historic revenues and profits; acquirers know potential when they see it and the synergy value you can share together is not diminished because you lack an asset to get to the next level. However it does weaken your position because it will be clear that the potential acquirer holds most of the cards when it comes to driving growth in the next stage of the business and this will be reflected in the price paid for the business.

Whether you are still on a growth curve, or already plateaued at a reasonable size, if you have a consulting business in an area of market demand then it’s possible that a compelling business case can be put to a strategic buyer or financial investor, such as a private equity firm.

The key is timing and motivation; don’t let your firm get too far past its best by date. And if you’re fresh enough to want to carry your firm forward under new ownership, rather than take the exit door ASAP, then this may be your route to put cash in the bank as well as pump up your future compensation.

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Why do human capital consultancies plateau? Part two – Clients & IP

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Last week we explored the important role a unique value proposition plays in helping human capital consultancies continue to grow, rather than plateauing at a revenue level of $3m, as so many do. This week we’re looking at how to target the right clients for growth and how to create and leverage intellectual property (IP).

After articulating the UVP (Unique Value Proposition) to include some indication of the results and return on investment a client might expect, the leadership team have to get it to the right clients; those where you have the right to win.

To find out where you have the right to win, go through your invoicing file and look at where your business has come from over the last few years. Create a simple matrix: a service/market matrix, like the example below.

Service Market matrix

What are the main industry verticals or affinity groups which have delivered the majority of your revenue and profit? What are your main service offerings? Find the intersecting cells which are strategic for your firm then focus your sales and marketing efforts there. In this way you will be able to drive revenue and growth.

Scaling a human capital consultancy requires a set of codified offerings which a growing team of trainers or consultants can deliver. This could take the form of, among other things, methodology to assess leadership skills, process maps, interview guides, or questionnaires. Having IP that is exclusive to your firm and that can be used by consultants with the same effectiveness, no matter if they are a principal or a new starter, makes you far more valuable to a potential acquirer. In fact, for those of you with aspirations to sell it’s worth having a look at our buyers research report, which shows that after financial stability buyers are looking for deep domain expertise. We are frequently asked to find firms who have a strong inventory of IP.

This IP also needs to be managed; who knows it and who needs to know it? What are the development plans to help the new consultants get up to speed quickly and how will you know if they are effective? This is the very subject you consult on your clients with and, like the proverbial cobbler’s children, it’s too easy to wing it and fall behind within your own firm. The IP you use to deliver your service is a major asset and should be managed accordingly.

If a client were to come to you saying they wanted to get the right UVP, to the right clients with the right IP, you’d do a superb job of building their leadership and organisational capability to deliver. So why not think of yourselves as your own most valuable client and do the same.

If you’d like to discuss any of the issues raised in this blog please contact us.

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Why do human capital consultancies plateau? Part one – UVP

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We all know the saying, “Do as I say, not as I do.” And often businesses fall victim to this too, whether it’s the IT consulting firm with out-of-date IT systems, or the management consulting firm with a vague strategy for its own growth. But what about human capital consultancies? Do they have superior leadership abilities which allow them to grow in ways others can’t? Or do they fall victim to the same habit of not using their own core competencies internally?

This week, in the first of a two part series, we’ll be looking at how human capital consultancies can develop their unique value proposition (UVP). Next week we’ll examine how to target the right clients to help your consultancy grow and the important part intellectual property (IP) plays.

Organizations are dealing with huge changes in the composition of their workforce. Baby boomers are leaving or looking for reduced, flexible working, millenials are arriving with different motivations for working and by 2020 there will be five generations working in the same workforce. This leaves businesses with big talent challenges to manage, as well as their day job of selling more products or services.

You’d think all that change would create fast growing human capital consulting firms, with strong sales, profit growth and equity value. Unfortunately you’d be wrong as only about 50% get past the first stage of growth, the rest plateauing around the $3m revenue mark.

So what’s the problem and how do you make sure your firm is one of the 50% that breaks through this first glass ceiling to grow equity value? The key is to get the right UVP, to the right clients, with the right IP.

This is Equiteq’s 8 levers of equity value, which was can use to highlight the levers in human capital firms which typically drive equity value up and those which drag it down.


Human capital firms usually score well on the east west axis, with consultant loyalty and client relationships driving equity value up. However market proposition, sales and marketing and IP frequently drag equity value down.

The UVP has to answer the exam question ‘Why should I buy from you?’ and this is where human capital consultancies are missing a trick. The Kirkpatrick Phillips model (pictured below) is used for evaluating human resource development and training.

Measuring training V2


Because an overwhelming majority of participants said they liked their day out of the office in training for example (Kirkpatrick Phillips level 1) doesn’t put you in the running for bigger, more profitable contracts. For the CEO of an organization you are targeting this is not a compelling reason to invest in human capital consultancy work. What’s needed is to move up the pyramid and demonstrate the return on investment that the work provides.

Yes, it’s tougher in human capital firms than say, IT consulting firms, to measure the outcomes, but the leadership team have to create a UVP aligned with their clients’ pain points and produce measureable results. The higher up the pyramid the better. Consultancies typically diffuse their offering too broadly. It’s better to focus on a niche offering and do it well. In fact, buyers of consultancies have told us that they prefer niche offerings when they are assessing whether to acquire a firm.

Next week we’ll look at how to target the right clients to grow, as well as the important role IP plays.

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What is the optimal balance between permanent and contractor staff in a professional services business?

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A significant challenge for any management team of a professional services firm is pursuing the most efficient way to grow the business. A company will look to expand by growing current clients and securing new business, but new business projects need balancing against available resources. Having a large percentage of consultants sitting on the ‘bench’ is a drain on overheads and impacts profitability. Thus the question is raised: What is the optimal balance between permanent and contractor staff to help drive growth for a professional services firm?

Certainly, there is a definite trend in the use of more contractors in the industry. This follows the increasing number of consultants who are operating as freelancers, taking more responsibility for their own careers. This trend has had a noticeable knock on effect within the buyer community where there is now less emphasis on the need for permanent staff.

In the past our valuation models would have assessed a firm operating with a larger number of contractors negatively, impacting on the value of a firm. However as industry sentiment has changed, our valuation model has evolved to reflect a more positive view of contractors. In recent times we’ve witnessed firms made up of 75 per cent of contractors realize full value when sold and whilst some buyers are still very negative, the scales are tipping in favour of a balanced employment model.

Of course this still doesn’t help us as we ask what the appropriate split is between permanent and contractor staff. In reality there is no right or wrong answer to this, it is a subjective decision belonging to those in charge, but there are definitely certain roles which should be held by permanent staff if value is to be optimized.

A professional services firm absolutely must own its business development, client relationship management, intellectual property development and practice management. If all of these are firmly held within permanent roles in the organisation then remaining work can be delegated either to contractors or other permanent staff. In the case of contractors, a firm – and clients – can benefit from access to a broader range of skills and the cost flexibility they offer.

Naturally, it’s still important to bring in the right kind of contractor and that’s not just to do with the skill set. Making sure that a contractor is not only skilled enough but also a good cultural fit for the organisation is of paramount importance.

As far as the industry is concerned we’re moving away from the notion of just two camps of permanent or contractor. Now we see organizations categorize operations in a wide array depending on how consultant compensation is structured, something which we believe is healthy for the future of professional services firms.

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Three years to multiply the value of your firm

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The eventual price that a buyer agrees to pay for your firm is based on many factors. But ultimately it boils down to how hungry they are to get the benefits of future profits they see being generated from the merging of the two companies and their mutual strengths. A significant difference between consulting firms compared to most non-services businesses is that the assets are not physical plant or machinery, but people, client relationships and intellectual property. On the face of it, these assets are risky. If someone buys your firm today, could all the value in it evaporate tomorrow?

Achieving a valuation that financially exceeds what you could earn by continuing to run your business independently is predicated on a number of factors, but convincing the buyer that future profit growth is sustainable is critical. If you provide a credible, robust profit forecast three years into the future, and are then able to also show the additional profits that will come from synergies over the same period of time, then premium valuations are achievable.

So having said that most of the value of a consulting firm is based on future profit streams, why are the three years leading up to a sale critical to securing a rewarding valuation and deal structure?

Take a look at these four profit growth profiles leading up to a buyer negotiation. Imagine you are the buyer of your firm and ask which case generates the most belief in the future in the mind of the buyer?

Past and future forecast scenarios

It’s interesting to note that nearly every firm we talk to forecasts that they have a great three years ahead, no matter what the past looks like! This is why buyers look at forecasts of potential acquisitions initially with extreme skepticism. What the seller wants to do is quickly eliminate any negative thoughts about financial instability and move the focus onto the future profits that will come from the synergies of the two companies. But the weaker the past performance is, the more difficult this is to achieve.

So let’s put this into real world context. For argument’s sake, let’s assume your firm is a good fit for a buyer, it is generating, say, $7.5m EBITDA (net profit) and for illustrative purposes we assume a mid-point valuation of five times EBITDA (the average multiple in the consulting sector). It doesn’t matter whether your EBITDA is $5m or $20m, the scenarios below illustrate the possible impact of buyer confidence in the future. Don’t read into the actual multiple figures or percentages as absolute or accurate at all, they are just there to show the dramatic variations that can occur.

Scenario 1 may get you 5 x $7.5m = $37.5m with 40% up front and the rest in a 3 year earn-out based on performance

Scenario 2 may get you 1 x $7.5m = $7.5m with nothing up front and all in a 3 year earn-out based on performance

Scenario 3 may get you 3 x $7.5m = $22.5m with 30% up front the rest in a 3 year earn-out based on performance

Scenario 4 may get you 8 x $7.5m = $60m with 60% up front and the rest in a 2 year earn-out based on just remaining in the business

As these examples illustrate, there is a lot to play for. If planning to sell your business in the future, significant value enhancement is possible if you build in the operational characteristics that will assure growth in revenue, profits and equity value. And by showing a potential buyer steady growth in the business over the past three years, it gives them much more confidence that they will realize value from synergies if they were to buy your business.

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