There are definitive characteristics of a professional services firm that tend to contribute to higher valuations than firms that lack these characteristics. By focusing on these characteristics at your firm, you and your team can build the value of your specialty services firms. All the characteristics tend to promote profitability, growth and value while reducing risk.
A higher base level of profitability enhances value relative to a lower base. Recurring revenue tends to diminish risk and to promote growth, as well as minimize marketing costs, all of which enhance value. Low capital intensity and low working capital requirements suggest that for every dollar of earnings, there are more dollars available for reinvestment for growth or for distributions. Brand recognition can enhance pricing power and profitability and helps avoid the competitive jungle of the lower end of clients in your field.
At the same time, specialty services firms often have a couple of characteristics that can increase risk and reduce value, like relying too heavily on one charismatic leader that drives the success of the firm, or creating a personal brand for the firm rather than an enterprise brand. If a specialty services firm is too heavily dependent on one or a couple of revenue-generators, there is a risk to the expected future cash flows if any of them were to leave. And, if all of the goodwill of a specialty services firm resides in one or two key persons, there is little basis for growth or significant value.
What are you doing to reduce that risk in your company? What are you doing to grow your enterprise brand under which individual professionals can prosper? Join us to discuss the risks must be considered carefully in the context of professional service firm valuations, and the characteristics of a firm that will drive valuation.
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Greg helps consulting firm owners to grow profits and equity value and/or successfully sell their firm at Equiteq, the leading M&A advisor for consulting firms, providing merger, acquisition and growth services exclusively to the business consulting and IT services industries. Greg is a Managing Director at Equiteq and has recently been announced as one of the winners of the M&A Advisor's Emerging Leaders Awards 2017. Prior to joining Equiteq, Greg worked for a medical device company where he engaged key stakeholders to drive innovation within critical and ambulatory care. Greg began his career helping non-profit colleges and universities achieve their institutional goals.