Episode 163 – The Art of Valuation: Unveiling the Secrets Behind Firm Attractiveness and Price Determination – Member Case by Tom Zucker

In this session, we review recent research from over 200 acquirers that suggests the 5 attributes that make a firm an attractive acquisition target, and the 4 attributes that scare acquirers away. The research quantifies how “attractiveness” drives up valuations and how you can increase the worth of your firm.


Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, the host of the Pro Serve podcast, brought to you by Collective 54, the first mastermind community dedicated to the unique needs of a unique group of people. The leaders of boutique professional services firms. And today, we’re continuing on our exit series and we have a wonderful guest with us. He is a member. His name is Tom Zucker, and he is in the investment banking business. And his firm put out a piece of research called The Seller Experience Why Owners Get Premium Values. We’re going to talk about the principles in that. And the origination of this came from we had a member session. Titled how a ten person firm successfully sold itself to a 300 person firm. One of our members bought Mirage was the featured role model. He had an exit recently. This is episode 153 for those that are interested, and Tom attended that session and chimed in and offered some value. And since that time we had a lot of members saying, hey, who was that guy? And can we hear more from him? So we reached out and and Tom was gracious enough to join us today. So, Tom, if you wouldn’t mind, please give us a brief introduction of yourself in the firm. 

Tom Zucker [00:01:33] Right. Thanks for having me. Tom Zucker, president of Hedge Point. We help private owners sell their business for maximum value. With certainty. We’ve been doing this for 25 years, and we’re very fortunate to be part of collective 54. 

Greg Alexander [00:01:49] Excellent. So I read the white paper, The Seller Experience Why Owners Get premium values. And it was compelling. And I found it compelling because you heard directly from buyers. What makes a firm attractive. And it’s that word that really caught me, this word of attractiveness. And in your white paper you quantify, for example, what a some firms get eight times, EBITDA and another firm might get ten times EBITDA. And you summarized five key points that made a firm attractive. I thought maybe we could take them one at a time. And I’d ask you to define what that term is. And then, when we have our private member Q&A session, which is a longer format, we’ll have a full hour. Then we’ll dive into examples for each five and let members ask questions. So if you’re okay with that, why don’t we start with the first one, which, I’ve got the paper pulled up here in front of me, and it looks like the very first attribute that makes a firm get a premium value makes it more attractive as a strong management team. So why does that increase the multiple? 

Tom Zucker [00:02:58] The ability to produce revenues is directly proportional to the talent that sits behind it. So here we are as professional service firms, we are as good as the people that leave the office every single day. Right? And so our goal on a daily basis is to make sure when the buyer takes over the business, they can not only repeat the success that you have, but can grow from that. If you have aged professionals or you have people that are less engaged or just, quite frankly, have reached the top of their peak, there is no more growth that the company can experience. 

Greg Alexander [00:03:30] Very good point. You know, sometimes I see, you know, the founder is brilliant and the buyer meets the founder and says, oh my gosh, I want that person in my firm. They make a they offer a lie, they get into diligence, and they meet the management team. And there’s a major drop from the founder to everybody else. And it kind of spooks them. And they retread the other side. Either don’t do the deal or they trade it down so that I’m not surprised to see that as number one. So let’s go to number two, which is a differentiated service. So why does that increase the multiple. 

Tom Zucker [00:04:07] There’s if you think about a buyer’s perspective, you’re looking at your company. There’s a lot of people that are nice to have, a nice to have trade at reasonable multiples must have, oh my gosh, I need that capability. I need that person that’s differentiated. And so, you know, many of the sessions you’ve been having is on the topic of AI. AI is a unique skill set that many people possess. And as you start having those conversations and show that you’ve developed something that will take years or many, many hours to develop, I got to have that. And when I get I gotta have that, I get a turn to three, five times, expansion of multiples. 

Greg Alexander [00:04:46] Yeah. We got a member right now. Just turned down an offer at 17 times. He’s in the sustainability space, and it’s just hard as heck it’s a must have for a lot of cases. So, I’m not surprised that that was number two. All right. Let’s go to number three. So resilience in recessions or resilience in kind of new tech threats. So tell us what that is and why that leads to an expanded multiple. 

Tom Zucker [00:05:13] Yeah. And remember keep in context these these are things that were generated. We did a 200 person survey private equity family office strategic buyers. Why do they pay premiums. So they came up with the idea is that they’re fearful that something doesn’t continue or go forward. And the indicators they use is let’s take me back to what happened in, you know, the last recession or what happened during Covid. And they’re constantly asking that question. And so if you’re defensive, the answer is we have we continued right through there. No problem. My recurring revenue was there and all of my clients needed me. I was an essential service that was not cut back or passed back during downtimes. Yeah, and that’s when you get a premium, when you when you have that recurring revenue. Banks love it. And switch is a big part of how multiples get made. Right. 

Greg Alexander [00:05:57] Yeah. You know 2023 wasn’t a good year for a lot of people. If you actually had a decent year in 23, you proved to be resilient, resilient when everybody else wasn’t. You know, someday when you go to sell your firm, that’s going to be a wonderful proof, proof point. The next one I want to talk about, which I skipped over by mistake. But let’s come back to it. Strong market position. So what does that mean exactly? And how does that translate to a higher multiple? 

Tom Zucker [00:06:23] Everyone is trying to define what market they’re in. So you mentioned that one of your members getting a 17 times offer for the word sustainability. Right. And every couple of years there’s a new word that hops out that somebody’s got to have. And when you got gotta have that. That tends to make it very attractive building market position, you know. So for example, we’re in the middle market space for investment bankers. Many of my competitors have sold their business. We’re now sitting in a place where we have a very attractive platform that we’re able to. We just brought on a new managing director, that market position as being a platform for capability of providing, you know, independent M&A advisory service that allows us to be differentiated from others. Not. Not that it’s unique or can’t be duplicated, but at a point in time there’s a market position and all of our services fall into that category. And I’m surprised when we begin doing our work. How many people really don’t know the market, that they participate in the adjacent markets, and they certainly don’t know what makes them different from their competition. And that’s an exercise that a good investment banking firm does. They really pull out. Why are you special? Why are unique, why you’re different, and most importantly, not just from your own perspective, but the perspective of your buyers? How will they look at you? 

Greg Alexander [00:07:38] Yeah. You know, and this is why it’s so important to pick the right investment banker. And for our members and listeners, you know, you want somebody that’s in that middle market to lower middle market space because they know that you might not have your market position clearly defined. So therefore they’re skilled at doing that for you. It’s kind of like you go to sell your house and you hire a fantastic real estate agent who’s been selling homes in your neighborhood for 20 years. So when a buyer comes in, you know, they can explain why this is a desirable neighborhood, why it’s in the right school district, why the comps are what they are, etc., etc., etc.. Last thing you want to do is go higher up Goldman Sachs or JP Morgan. You know, you just they expect you to come to the table with a different, set of deliverables. I mean, they expect you to know what your category is, what your market position is. So it’s really important that if you’re thinking about exiting, you pick the right investment banker and you can hear from Tom, you know, somebody like him, knows how to do this and has the patience, you know, to help a first time founder don’t through an exit for the first time, do this. All right. Let’s come back to the white paper. So the last one, number five is scalability of business. I think I know what that is, but why don’t you explain that to the audience and why that translates to a higher multiple. 

Tom Zucker [00:08:55] This is a great book called The Boutique that my friend Greg has written, and it talks about this whole scaling phase, right? And as you talk about scaling, you get a commercial business development engine. You’ve got the ability to take it beyond the founders capabilities. And it is tantamount to much of what you preach and disciple to. But I want to know that I can take, you know, this business for two times revenue, and I want to know the profitability grows incrementally as I scale. Yeah. And I always refer to it no man’s land. That’s between X dollars a revenue and Y that it’s really, really hard to run a scale professional service firm. And once you get past why, likes a whole lot better. And so we all have our own X’s and y’s and whatever that number might be or whatever the scale might be. That’s the part that we always are looking for. And so I want to know that I can do that as a buyer of a business. 

Greg Alexander [00:09:46] Yeah. You know, when I, when I was reading the paper, I really liked it because to me it’s not a puff piece. It’s not just talking about the five things that make your firm attractive. The second half of the document is dedicated to the value detractors. In other words, what makes your baby ugly? So why don’t we? Why don’t we touch on some of those value detractors? So share some of those with the audience and and why they actually reduce the multiple. 

Tom Zucker [00:10:17] Yeah. I mean, so it’s kind of the inverse of attractiveness, right. And so if I’ve got a concentrated position where I have a customer that represents, let’s say it’s north of 40% of revenue, I get a little bit concerned that that particular customer goes away or loses interest in it or changes pricing. That’s a very big detractor. The other part of that is if if it’s dependent on you, the owner of the phone, right to your point, you get really excited. Very attractive owner founder. He’s excited, but unfortunately he’s of an age where he’s not doesn’t want to work for another 5 or 10 years. Yeah. And so I make my investment. What’s private equity is make it for, you know, a 5 to 10 year window. If you’re not going to be the guy that I look to not only run during that time period and more importantly, when I sell it, you’re not standing there. I’ve got a big lift. I’ve got to find somebody to replace the magic that you do as a founder and owner. That’s a really hard thing to do. And so you have to solve that problem for the buyers. The buyers won’t solve it for you. Yeah. 

Greg Alexander [00:11:13] You know, one that jumps out of me that I want to translate for the audience in the value detractor category in the report is this thing called an at risk supplier. And for those that are going to go to Tom’s website and download this report and we’ll show you where to get it in a second, you might say, well, that doesn’t really, apply to me. I don’t have suppliers. I’m not a manufacturer. Well, that’s not true. You do. Your suppliers are your talent. And if somebody is thinking about buying you as a service firm and you were using 1099 contractors, you have at risk suppliers, particularly if you’re using 1099 firms and only one of them. You know, these these firms, especially offshore ones, can run into trouble. They go out of business. And all of a sudden your raw ingredient, you know, your raw material that you use to produce your end product goes away. You’re not going to be able to sell, you know, in the pro serve space. They call that empty calories. In other words, when I buy you one of the assets of buying is your team. And if you have more than, let’s say, 20% of your labor force in 1090 nines. Then you really you don’t have a great team to acquire. So you. I’m either not going to acquire you or I’m going to acquire you at a discount. So, Tom, that was a great walk through of the report. So for those that are listening to want to get a copy of it, where do they find it? 

Tom Zucker [00:12:45] It’s point.com and we have an insight section where you can download this white paper plus others. 

Greg Alexander [00:12:51] Okay. And if somebody reads it and they want to double click and have a conversation with you or someone on your team, how do they get Ahold of you? 

Tom Zucker [00:13:00] (216) 342-5858. Zucker at any point that. Com. 

Greg Alexander [00:13:06] Boy. That’s a salesman at heart right there, who was willing to give his telephone number into the wild, wild world of the internet. God bless you. All right, well, listen, we’re so lucky to have you because our members are your target customers. Your skill set lines up perfectly. You know how to sell businesses like the ones that are in collective 54. You’re always very generous with your time and your knowledge here. Today was a great example of that. So on behalf of the members, thank you for being here. 

Tom Zucker [00:13:32] Thank you Greg. 

Greg Alexander [00:13:35] Okay. And, a couple calls to action for everybody. So if you’re a member, be sure to attend the private Q&A session with Tom and look for the outlook meeting invite to tell you exactly when that is. I hope you get a chance to read that paper beforehand, and you’ll get a chance to ask questions directly to Tom.  You’re not a member. I don’t know what’s wrong with you. You should become one. Go to Collective 54.com. Fill out an application. Some will get in contact with you. If you’re not quite ready for that, you just want to consume some more content. Check out our newsletter. It’s called Collective 54 insights. Again, that’s at the website. Or if you want to read the book, it’s called The Boutique How to Start, Scale and Sell a professional services firm. You can find that on Amazon. But until next time, I wish you the best of luck as we try to grow, scale, and exit your friendship.