Updated: Nov 1, 2022
Creating and achieving realistic financial goals is an essential part of any responsive management strategy as your company grows. That’s never been more true than during a sale, merger, or acquisition, when a company must determine what valuation is required for a successful transaction.
While calculating valuation is often about revenue, income, or other financial growth targets, the reality is that improving valuation is about much more than money. However, it can be challenging to determine what these methods are. This is especially true if you’ve been caught up in the ongoings of a business for a long time and can’t objectively evaluate your value and performance.
In these situations, it can be difficult to look with an outside eye and see your firm’s true strengths and weaknesses. That’s why many professional services companies looking to boost their valuation in preparation for a transition will hire a leadership coaching agency to help them create a plan of action.
Today, we’ll explain how professional services firms can approach their valuation and suggest different attainable methods for improving these metrics.
Explaining Professional Services Valuation Methods
For many professional services firms, it’s often easier to determine the value of other companies than it is to value their own. There are many traditional valuation methods that can be used. Unfortunately, some fall short when it comes to valuing professional services companies.
Some of the most common methods of valuation include:
EBITDA Valuation: This is a valuation based on earnings before interest, taxes, depreciation, and amortization (EBITDA). Typically, anyone looking to acquire a company based on their EBITDA valuation is looking for a multiple of 6 to 8 times before EBITDA.
Net Income Valuation: Another convenient metric is net income, which examines earnings after tax. Most buyers would be looking to see 11 to 14 times net income.
Revenue Multiples: If your company is new and growing fast, you may look to the metric of revenue or sales multiples. These should be between 1.3 to 2.2 times revenue.
There are many ways to calculate valuation. However, there are a few factors that determine the best way for your business. These include:
Type of firm
Overall firm profits
Monthly recurring revenue
How To Increase the Value of Your Firm
Many people believe that valuation is both an art and a science, requiring a good understanding of the business as well as traditional valuation methods. Fortunately, increasing the value of your firm utilizes a lot of the same skills.
A strong understanding of finances is beneficial. Furthermore, using your interpersonal and management skills to improve customer service, the employee experience, and create more valuable IP will all help boost your company’s overall value.
Here are some ideas of how you can get started today.
Build a solid company reputation
One of the most valuable assets that a professional services company offers is its name and reputation. Hire high-quality talent and train them well. This way, you can continue to attract and retain the customers that are so critical to your business.
A great way to do this is with effective marketing. As more people learn about your business, it will be easier for them to determine if they want to work with you or for you. Building this base of satisfied customers ensures a positive company reputation that no amount of money can buy.
Improve the quality of your customer base
By developing a strong niche and discipline around your core customer, you can lengthen the average customer relationship. You can also improve your repeat purchase rate, and increase your overall number of customers. Making these improvements relies on solid sales and marketing tactics. It also requires a savvy business development team that can help develop new methods for quality customer retention.
Improve the employee experience
It shouldn’t come as any surprise that employee talent at a professional services firm can make or break your company. If you take the time to improve the overall employee experience, you can develop a more cohesive team that works more efficiently and serves customers with greater efficacy. Some of the most critical areas to target include:
Hiring and recruitment
Strategic compensation design
Profit and revenue growth
One of the best ways to show potential buyers or investors that your firm is strong is by consistently growing profit and revenue. In an era of unprecedented unpredictability, this can be a challenge.
The easiest way to do this is through responsible cash flow planning and a clear and disciplined go-to-market strategy. Many of the most successful high-growth businesses now do this through digital leads and marketing techniques like assessments and consultations.
Know your metrics
Expanding beyond your current growth trajectory requires more than just the drive to succeed. It requires that companies establish critical metrics across various departments, including service delivery, finance and operations, and client relationships.
Then, once those metrics have been established, benchmarking the company and providing functional and process accountability can help the firm achieve greater success.
Deliver Long-Term Value During Your Transition With Leadership Coaching
There are a variety of considerations to keep in mind to determine whether a transition will deliver long-term value to your firm. In many cases, a poor exit or failed culture fit between organizations can cause a business integration to break down. One study conducted found that as many as 30% of business integrations failed for this reason.
You must be able to thoughtfully analyze and evaluate the value of your firm in the lead-up to a sale or acquisition. This can be the difference between a successful experience and one that fails. Once you have a strong understanding of your firm, you can differentiate between it and competitors or even allies. Then, measure the synergies to see whether the transition will be a success for both your employees and clients.
Contact ALTA Consulting for Better Leadership Coaching
Developing this understanding can be challenging. That’s why so many firms seek help from leadership coaches, who can help managers and leaders better understand this aspect of their business.
ALTA Consulting has been doing this work with professional services firms across Canada and the United States for years and would love to help your business reach its next growth or valuation target.
Are you interested in learning more about how you can evaluate, scale, or exit your business? Leadership coaching can help. Contact us today.