What is your consulting practice worth today?

Overview of consulting businesses

Consulting businesses are knowledge-based businesses.  Today, there are many consulting firms in niche industries eg: healthcare, government, information technology, human resources etc.  Consulting companies are service-based businesses. Therefore, they may be relatively easier to value as compared to other product based businesses. They also have relatively fewer assets as compared to other industries like manufacturing etc. Therefore earnings multiple is a popular method of calculating the value. In addition, as a sanity check revenue multiple is also used.

It is always a good practice for every business to do an annual valuation or a price check & have a defined exit strategy.  The below information provides few general guidelines for valuing your consulting practice :

Calculate the owner’s discretionary earnings :

This amount is usually arrived at by calculating the owner’s salary and adding it back to the EBITDA( Earnings before interest tax depreciation and amortization). The reason they are added back is to normalize the effects of any non-cash or discretionary items that may impact the valuation process.

 

Industry multiples

After you calculate owners’ discretionary earnings, the next would be to apply the industry multiples. In general,  most consulting businesses sell  3X-5X EBITDA multiple and 1-1.25X Revenue multiples

 

There could be many factors that may impact the valuation multiple, below are few major influencers :

 

1. Specialized skillset: It is demand and supply that will drive the firm value. If the skills are in short supply in a growing industry, then it can significantly increase the consulting practice’s value.
2. Historical growth and financial stability of the business: If the consulting practice has steadily grown consistently over the years, then it may be valued higher as compared to other firms in the industry.
3. Management & leadership: A strong management team, a robust business model that can sustain economic ups and downs can drive the practice value.
4. Scalability: While consulting practices are service businesses, many large firms have well-managed systems, processes and management teams that help them scale faster as compared to their peers. This can significantly increase the firm’s valuation.
5. Client base: A practice with a good mix of paying clients with long-term clients will have a higher valuation. The concentration of clients is also an important factor. There is higher risk involved if there are only 2 or 3 clients who contribute to a majority of the firm’s revenue vs a large number of clients.
6. Brand: Branding is extremely important especially in today’s world of social media. A strong brand will always offer a higher valuation.
7. Pricing strategy: Firms with a strong pricing strategy will offer a higher valuation.
8. Long-term & consistent client contracts: Year over year contract renewals is a key indicator that the firm is consistently able to deliver quality service to its clients. In addition, long-term clients often are a source of additional referrals adding to the firm’s top line. Therefore, this is one of the key indicators to look out for that can drive the valuation.
9. Barriers to entry: Certain professional firms have barriers to entry in the form of licensing, specialized knowledge eg: Enterprise resource planning software etc. Therefore, this can be a major influencer.
10. Innovation: Firms that are continually innovating and readjusting to meet the customer needs will always have a higher valuation compared to their peers.
11. Digital footprint: Prospective customers are looking at your online presence before making a purchase, therefore having an active social media presence will almost always be a major influencer in driving your business valuation.

 

Few popular categories and their multiples information. For all other industries, we can assist you with your valuation needs based on your NAICS code. 

 

Healthcare consulting practices: 3X-5X EBITDA

 

IT Services (includes industries below): 2.5 – 3.5 Adjusted EBITDA

• Online digital marketing agencies/search engine optimization (SEO)
• Information technology consultants and outsourcing.
• Network engineers
• Website developers.
• Data Security consulting business

 

The above key points are just general guidelines. The true value of your business is eventually what the buyer is willing to pay.

If you require additional help with business valuation, contact us via our contact us form.