How Much Is Your Firm Worth?

How Much Is Your Firm Worth?

Members of Collective 54 are searching for one of three things for their professional services firm: growth, scale, or exit. From our members, we realized that knowing when to exit is daunting if you don’t know how to value a professional services firm. But this doesn’t just apply to exiters. If you’re hoping to exit one day, you need to know what your firm is worth now, how much you want it to be worth in the future, and what you need to do to go from point A to point B.

This sparked the idea for the Firm Estimator, which was launched in December 2022. Since then, over three thousand founders of professional service firms have accessed it from our website. The impact of the tool has exceeded expectations. For example, we had a member of Collective 54 use the tool to value his firm so he could price an equity incentive for a key executive on his team. This member claims the tool provided him with a more accurate estimate of his firm than a local appraisal firm did. Our estimate was calculated in 20 minutes and was free; the appraisal firm took 30 days and charged $15k.

The Collective 54 membership is made up exclusively of first-time founders of boutique professional service firms. These are consulting firms, marketing agencies, systems integrators, software development firms, legal services, accounting firms, architects, etc., in North America with between 10-250 employees. Practically all of these leaders have never been through an exit before and, therefore, do not know how to go about valuing a professional services firm. They’ve never needed to know before and are surprised that 10 questions can get to an accurate estimate. But it does because it’s designed specifically for professional service firms, asking questions about what really drives a firm’s worth. The Firm Estimator provides data within +/- 10% accuracy on average to date. Meaning we may estimate a firm to be worth $5 million, and it sells for $5.5 million.

So, the most common question is, “How the heck are you guys doing this?”

The answer is straightforward: We see a lot of deals.

Valuing Professional Service Firms With Data Backed by Real Deals

Two dozen members of Collective 54 have sold their firms in the last three years, totaling close to $1.5 billion, and we had a ringside seat for each deal. Another 37 members tried to sell their firms but failed to do so, and we bore witness to these negotiations. In addition, some of the members of Collective 54 are M&A advisors and investment bankers who represent boutique professional service firms and share their knowledge with us. We have a lot of data points, and the data set is growing every month as more M&A activity takes place.

Most importantly, Collective 54’s singular focus on a tight niche—thriving boutique pro serv firms in North America—has created maybe the most accurate and reliable data in the market. This is very helpful to founders who may be wondering what their firm is worth.

For instance, some of our members are approached by potential acquirers. These acquirers will ask, “At what price would you sell your firm?” Founders don’t want to say the wrong thing and shoot themselves in the foot. If they don’t answer the question, the opportunity does not go anywhere. If they give an answer that is too low, they leave money on the table. If they give an answer that is too high, they scare away a potential acquirer. Yet, if they answer the question directly with a price range and can intelligently explain how the number was determined, the potential acquirer knows they are dealing with a capable founder and their interest increases.

This is where Collective 54’s focus on pro serv firms in North America becomes especially important. With the data being sourced from this single industry and segment, the Firm Estimator provides an accurate estimate. No money is left on the table because you accidentally lowballed years of hard work with an estimate that was designed for a different industry.

Listen to how one member leveraged Collective 54 when selling his firm.

The Magic Behind the Curtain

There’s no need to simply take our word for it. You’re a founder, and you work with hard facts. So, the following are the variables in the algorithm, why they are important, and a little bit of how they work:

1. Total EBITDA. 

An EBITDA business valuation-based calculator is important because pro serv firms are most often valued on a multiple of EBITDA. For instance, a firm with $3 million in EBITDA might be valued at $30 million if an acquirer puts a 10x multiple on the EBITDA. Total EBITDA provides a starting point for the valuation.

2. Revenue growth rate. 

Fast-growing firms are worth more than slow-growing firms. For instance, a consulting firm growing at 30% is worth more than a similar firm growing at 10%. This makes sense from an acquirer’s perspective, as they want to participate in this growth, and are willing to pay up for it.

3. Profit margin. 

Firms with healthy margins will have a higher valuation than firms with skinny margins. For instance, a systems integrator with 40% margins is worth more than a similar firm with 15% margins.

4. Recurring revenue.

Firms with recurring revenue are valued higher than firms with project-based revenue. For example, a market research firm with 80% of its revenue from subscriptions is worth more than a consulting firm with 100% of its revenue from non-recurring projects. Lumpy businesses with limited forward visibility are more risky than recurring revenue businesses, and thus are valued less.

5. Client concentration. 

Firms that have a diversified client base are worth more than a firm with a small number of clients generating the majority of revenue and profits. If one of those key clients leaves suddenly, a large portion of revenue is lost, but the diversified client base barely bats an eye losing just one customer.

6. Client tenure. 

Clients that stay with you for years suggest you have high client satisfaction and lots of demand for your services. Therefore, firms with client tenure measured in years are worth more than firms with client tenure measured in weeks or months.

7. Employee tenure. 

Turnover makes it very hard to scale a pro serv firm. Therefore, firms with low but healthy employee turnover are worth more than firms with high and unhealthy employee turnover.

8. Founder dependence in sales. 

Firms that depend on their founder to bring in clients and grow revenue are worth less than firms that have revenue being generated by multiple people. An over-dependence on a founder makes a firm risky and, therefore, not worth much.

9. Founder dependence in delivery. 

Firms that depend on a brilliant founder to deliver work are worth less than firms that have many employees delivering for clients. An over-dependence on a founder, in this case in delivery, is risky and therefore gets discounted.

10. Founder age. 

Firms run by older founders are worth less than firms run by younger founders. Why? Acquirers are buying the future, not the past. They want to know the person they are backing has a lot of runway in front of them. If the founder is older, s/he must have a fantastic successor ready to take over.

The reason these variables are included in the Firm Estimator is because they affect two things: Does a deal close and what price does the deal close for? There are other variables, such as the market the firm is in, the service it offers, the client roster, etc., but the other variables are inputs into these key 10 items. By themselves, they are irrelevant. For instance, a firm could have a gold-plated client roster, but if they are not generating high profits, no one cares.

Valuing a Professional Services Firm Isn’t Just for Exiting

There is an additional benefit to using the tool beyond determining what a firm is worth. Long before a founder might want to sell their firm, they should be managing the firm in such a way that increases its valuation. We all exit someday. We die and cannot run our firms from the afterlife.

When that time comes, you want to maximize the value of the firm, and some of these items take a while to address. For example, many boutique pro serv firms have high revenue concentration. A handful of clients represent most of the revenue and profits. This takes time to fix. Expanding a client roster to eliminate revenue concentration does not happen with the flip of a switch. Yet, some founders do not address this issue until it is too late—when they want to sell. And this can result in a failed exit attempt or a heavily discounted sale. This is unfortunate and avoidable. By using the Firm Estimator periodically, founders can keep themselves focused on what matters most—the items that drive valuation.

There has been a surprising use case worth mentioning. Inside Collective 54, there is a type of member referred to as a power member. The distinguishing characteristic of power members is that their businesses are outperforming conventional members by as much as 2x. These members behave differently in almost everything they do, and this now includes their use of the Firm Estimator. For example, power members use the Firm Estimator regularly, whereas conventional members use it once. When asked, power members claim that they want to chart the quarterly change in the estimated value of the firm over time. This empowers them to see how their efforts are affecting wealth creation, and it informs them how the macro environment is changing.

What to Do With Your Initial Estimate

So you’d love to become a power member, but first things first: Users of the Firm Estimator should schedule a call with a representative of Collective 54 to discuss the results. During these conversations, users are able to ask clarifying questions and learn ways to increase the worth of their firms.

For example, a user recently used the Firm Estimator and disagreed with the estimate. She scheduled a call with a Collective 54 representative and learned she was calculating EBITDA incorrectly. Once this was fixed, her estimate went up and it was more accurate. This was a big relief to her since she was fielding calls from potential acquirers and wanted to be armed with accurate information.

Once the estimate is accurate, which often happens on the first try but never takes more than two attempts when assisted by a representative, users can get to work on the issues that bring the estimate up.

For instance, many boutique pro serv firms are too dependent on the founder, and this reduces a firm’s valuation. We call these Hero firms—an all-powerful founder running the firm with a bunch of helpers. No one wants to buy a firm like this because if something happens to the founder, the business falls apart. Collective 54 is helping many founders replicate themselves in others, whereby employees can do what founders can do just as well as they do it. This is accomplished by applying the succession process outlined in The Founder Bottleneck, available exclusively to members of Collective 54.

And this is just one example of many wealth-creation programs members engage with in the community.

You’ve Learned How to Value A Professional Service Firm, But There’s So Much More Available

The Firm Estimator is just one tool inside a deep toolbox available to members of Collective 54. Non-members can get access to the Firm Estimator, but they do not have access to the solutions designed to fix issues dragging down the estimate. These tools are available exclusively to members. If you found the Firm Estimator interesting and want to take it a step further, consider joining Collective 54—the first mastermind community dedicated to the needs of boutique professional service firms.

Whether you’re already considering joining or want to start by talking through your firm valuation, schedule a call today. And if you haven’t already, find out the value of your firm with the Firm Estimator.

Episode 120 – How a Consulting Firm Embraced Trial and Error When Building a Sales Team – Member Case by Scott Arias

Building a sales team inside of a consulting firm is hard. However, it is a requirement if a firm is going to scale beyond a Founder-led lifestyle business. Adding to the difficulty, is the need to go through an expensive and time-consuming trial and error period. It takes patience and many experiments before a firm figures out what works for them.


Greg Alexander [00:00:15] Welcome to the Pro Serv podcast with Collective 54, a podcast for leaders of thriving boutique professional services firms. If you’re not familiar with Collective 54, with the first mastermind community dedicated entirely to the unique needs of leaders of boutique pro firms. My name is Greg Alexander. I’m the founder and I’m going to be your host today. On this episode, we’re going to talk about redefining business development. A lot of us are in the process of re-engineering how we go to market, so to speak, and this is going to be a timely topic. We’ve got a great role model with as someone who’s just recently done this successfully with some outstanding results. His name is Scott Arias. Scott, great to see you. Welcome to the show. And please introduce yourself. 

Scott Arias [00:01:04] Yeah. Great guy. Great meeting you. And. My name is Scott Arias. I am the founder and the CEO of a consulting company, and we’re a boutique Professional services. It basically provides services company that works for the government. 

Greg Alexander [00:01:27] Okay. And tell me a little bit more about the types of services that you provide. 

Scott Arias [00:01:33] We have four main services. The first one is pre-construction services. That’s plan schedules, that type of thing. The second one is security services. We provide field staff for embassies and actually they’re kind of interesting. We got into Amazon nationally, companies like that. And then the the third section is skilled staffing. We we don’t only do the pre-construction plans, but we staff the management positions on a job. And the fourth sector is training. And it kind of goes back to my history because I was a college professor once in my past life. 

Greg Alexander [00:02:13] Okay, very good. So we’re going to talk about redefining business development. And the team gave me some numbers today about your business. And I’m going to go over them with you because they’re absolutely mind blowing. And I want to hear how you did this. So I understand that you added almost 100 new clients in 2022. Is that correct? 

Scott Arias [00:02:31] That’s correct. 99. 

Greg Alexander [00:02:32] Wow. My gosh. That’s amazing. You’re up over 5000 clients now and you’re getting about 80% of your business from repeat purchases. Is that also correct? 

Scott Arias [00:02:43] That is correct. Yeah. 

Greg Alexander [00:02:44] I mean, so those numbers would suggest, you know, what you’re doing in the business development space. So I understand that you recently kind of redefined it. So maybe we can do a little before and after. Let’s start with the way you used to do it. Tell me about the changes that you’ve implemented and tell me about the way you’re doing it now. 

Scott Arias [00:03:03] Well, you know, when I started the company, I you know, it was just me. So I decided, you know what? I’m going to start, you know, emailing people directly. You know, so I, I found a government website that publishes all the solicitations for the U.S. government on federal construction projects. So I just started emailing about 50 people a day. And then so I did that. I say 50. But then after the first month, I didn’t get anything, so I doubled that. And then I went to next month, didn’t get anything, so I doubled that. And then it took me nine months to get my very first client and I was actually on the verge of quitting. Wow. And and so I got my first client and it was just email campaigns, essentially, you know, to find work. And that evolved over time in the first five years, you know, And it’s not you know, people ask me all the time, well, how did you come up with, like your core values that kind of lead to the success of your company? And I say, well, I didn’t just sit down and write them. It was just kind of who we were at that point. So after about six years in the company, I just, you know, I asked myself what after I visited iOS presentation Entrepreneur Operating Systems, and I thought, what are what are we really do that bring clients to us? And then we keep clients. And so we developed these three core values. We call them RUG. It stands for Do the right thing, have urgency and be the gold standard, because that’s what we were, you know, we did things in urgency. We’d get it done overnight. We stay up all night long. We always did excellent work to help the contractor and we always did the right thing. If we felt like we made a mistake, we owned up to it. And then with that kind of formula, we not only just, you know, got new clients, we kept the existing clientele. And when I say 80, it’s probably close to probably over 90 because many of our services are repeat services, because they get done with the job and then they get another project. Yep. 

Greg Alexander [00:05:21] Okay. And then this this redefining of business development in particular, meaning sales and marketing. The team explained to me that you experimented with different approaches and you recently went through some kind of redesign. Could you share a little bit of that with us? 

Scott Arias [00:05:37] Well, you know, I got we got to a point where our organization grew from me to probably about 120 people. 

Greg Alexander [00:05:44] Wow. 

Scott Arias [00:05:45] And and so, you know, we had played obviously, I was the business development. My background was I was a Navy recruiter. So I was used to being an aggressive salesperson, you know, And then that kind of transition away from me because I had to develop bigger relationships. So I had a somebody manage that process. So we thought at first, well, you know what? Maybe we don’t know what we’re doing and we should go out and get help. So we went and got, you know, we searched around for a company that would help with the business development and the marketing piece. We landed on a marketing company that actually does a pretty good job for us. Took a lot of headache off my shoulders. But the business development sector, after we went through it, we spent about six months. We realized that if we were better at it than they were and we knew what we were doing, we went through trial and error. We went through the school of hard knocks, so we knew what worked and we knew it did work. We knew where the target audience is, where we knew we knew our customer profile. So through that experience we realized, man, we look, we know a lot more than we give ourselves credit for. So we took that information and we separate marketing and sales. We outsource a portion of marketing. We do a combination of email campaigns, phones. You know, a lot of people think phone is dead, you know, but in the construction space, it’s not. So we we contact people. We have a person dedicated it all, all day long, every day to get us pre-qualified with different contractors via phone. And then we have two salespeople that are kind of going back to the other piece of marketing. My son is actually in charge of that sector. And he does the, you know, the filter and the thoughts and and sees who’s was awarded the jobs and gives hot leads and warm leads to our sales team and then they follow up and we have a couple of people who do do sales and I don’t really like to call sales because it has a bad connotation. But you know, the business development sector because we know once we get them in the door, our staff is going to knock it out of the park. And, you know, you can’t you can’t have a good business development and you can’t sell something unless your unless you’re really selling something of value. And that’s really what spring brings more work to us. 

Greg Alexander [00:08:21] You know, for those that are listening out there, something about Scotts business that’s a little different but makes business development more challenging, in my opinion, is that, you know, the government awards contracts and this is information that’s available for anybody to go find. So his process is to see, you know, who got the contracts and then reach out to those people and try to, you know, sell his services into those existing contracts. The problem with that is, a what makes it so hard is that everybody can see it. So it’s super competitive. I mean, there’s all kinds of companies sending emails and telephone calls because, you know, once you tell somebody, hey, there’s this $100 million project that just got funded and they need a company that can do X, Y, Z, and everybody that’s in that space is all over that and they flood them. So the level of difficulty is higher, in my view, in that setting. Now it is nice that, you know, there’s existing business to go after. You don’t have to kind of manufacture your own business, but it does take, you know, quite a ability to execute, to win. In other words, beat the bad guys. Scott Did I describe that correctly? And is there anything more to that process that’s that’s worth discussing? 

Scott Arias [00:09:30] Well, you know, you’re you’re right about our field portion of a reconstruction portion. And but for security services and training, it’s a lot more like we’re developing that. We’re work responsible. Well, our our business developing process is not creating a need. It’s the need exists. It’s just fulfilling that need. Well, in the training space, the security space, we have to go out there and get it. And that’s a that’s a little more difficult. And honestly, we struggled with that because it was out of what we were used to. But I think we’ve got a good process in place now. 

Greg Alexander [00:10:06] Okay. You mentioned you went through this trial and error period. How long did that last? And and when did you know you really hit on the winning formula? 

Scott Arias [00:10:18] Well, I believe that process equals success. So you can’t. And so we constantly go through an evolution. We get a process in place. We execute. We come back and look at the process. And I’m talking about every quarter, you know, we’re giving now our decision may be, hey, it doesn’t make sense to change anything. We have enough time or maybe we know this doesn’t work and we go see. And so it’s a constant evolution of making your process bigger, better every time. And then when you’re companies growing like me or my company went from me and I made $7,000 my first year. So we’re going to be about 22 million this year. Wow. I mean, that’s that. And it went from me to 180 some other people now. So if we’re going to sustain that kind of growth, we I always tell people last year was a bad year for us. We made we only grew 27%. And and the truth is that we’re just hitting that every every year. We just continue to just just expand our services and do more and get more clientele and. Definitely can’t just sit back and wait for people to come to you. Yeah. 

Greg Alexander [00:11:36] You know, your your business story going from 7000 to 22 million, one person to 180 people is an amazing and inspirational business story. But you and I had a chance to chat and I learned a little bit about your personal story, particularly your military story. And that was equally, if not more so, inspiring. Would you mind sharing with our community a little bit more about your personal story and and how you how you went from this military career to this business career and the things that you deployed in your business career that you may have learned in your military career that has resulted in all of this success. 

Scott Arias [00:12:14] Well, I’m going to make a very long story very short. Okay. So unlike you do, Greg. No, I’m just joking. But I. I’ll play it back. Yeah, I, I so I, I grew up in Albuquerque, New Mexico, and my brother was in the Navy, so I joined the Navy. And the Navy fit me well. You know, I’m a little bit OCD, and so the military fit me well. The way they make amends, the way they fill their clothes. Anyhow, so I did multiple tours, went to then did a recruiting tour, did a tour at Camp David, did a tour in the Middle East during Operation Iraqi Freedom. Operation Enduring Freedom. So about my eight year mark. After I was promoted Chief Petty Officer, I got hit by a car head on. I was riding a motorcycle. My foot was was wasn’t severed, but it was a bag of bones. Not to be graphic or anything, but so they they basically took my leg that night. And then they I had went through another of what, four surgeries, ah, spent three months recovering and went back for another two surgeries, and I spent 11 months recovering. Ultimately, what Rig-i returned, returned me back to active duty service, was Carl Brashear, which is the guy from Man of Honor. If you’ve ever seen a movie with De Niro, he was the guy they made the story about. Very, very inspirational man. And then also Senator Trent Lott, which I was a senator from Mississippi. So they they interceded because the Navy told me no. And I and then after talking with Karl, I decided, you know, there’s another avenue, and that’s what I took. And so that taught me a very valuable lesson. Number one, persistence pay pays off. So when I was going through nine months of trying to find a client, I also remember the 11 months I recovered from losing my leg and go through prescription drug addiction. So, you know, that’s you know, so that was a very, very good lesson for me. Ultimately, I returned Baghdad to duty and went to the Middle East. Then, after being there for three years, I fell through an Iraqi oil platform, a bust up my leg pretty good, and then medevacked back to Walter Reed. And that ended my career. And then I went through multiple different I went through three different companies after I got out and seeking for purpose, seeking to do something greater than to make money, although money’s good, you know. So so I ultimately landed on opening my own company, and. And the rest is history. 

Greg Alexander [00:14:59] Yeah. Well, thank you for sharing that. God bless you for everything that you’ve done. It’s a great, great, great story. We’re so lucky to have someone like you in our community. I can’t wait for the member Q&A session. I’m sure they’re going to have lots of questions. But, you know, starting these firms is hard. It’s not nearly as hard as what you’ve been through personally. And but it’s great to see somebody like yourself being able to transition to a business career and not just go to work with somebody else, but start their own company and knock it out of the park. I mean, from 0 to 22 million in a short time period is pretty amazing. So again, on behalf of all the members, thanks for being here today. Thanks for sharing your story and thanks for being part of our tribe. 

Scott Arias [00:15:38] Sounds great. Great. Have a good day. 

Greg Alexander [00:15:40] Okay. All right. Couple of calls to action for those that are listening. If you’re a member, be sure to attend the Friday Q&A session with Scott. You can ask your questions directly to him. I think you’re going to get some value out of that. For those that are also running their business on EOS, like Scott is. We wrote an EOC Collective 54 integration plan. It helps you customize EOC to the unique challenges of running a boutique process firms to check that out. And then also, you know, if you’re interested in redefining your business development process, as Scott has done, a couple of templates in the resource center and in the companion courses, look for the marketing strategy template, the sales strategy template, and the account plan template. So hopefully that’s helpful. If you’re not a member and you want to meet really interesting people like Scott, consider joining. Go to collective 54 com fill out the contact us form and somebody will get in contact with you. We’re not quite ready to join, but you want to consume some great content. Subscribe to collect 54 insights and you’ll get three things every week. Monday you get a blog, Wednesday you get a podcast, and Friday you get a chart. Okay, So thanks for tuning in and listening. And until next time, good luck as you try to grow, scale and exit your firm.