Consultant News in Peterborough, New Hampshire is probably the most prestigious advisory news publication and is distributed worldwide. Awwhile is back because they have received a lot of questions about "how to evaluate a consulting company." . . . . Whether they are medium-sized companies linked to industrial giants, or whether they are looking for partners to evaluate fair valuations when evaluating new partners. In order to address CN's coverage of the topic, they asked Charlotte's consultant and valuation analyst Paul A. Halas, Jr. Outline his valuation techniques as it applies to consulting firms.
Thomas D' Ufrey said: "The value of a thing is known for its needs." For management consultants, the more modern question may be "the actual dollar value of the consulting firm."
Some people suggested in the past management consulting company [IMC] meeting that the consulting business is actually just a professional enterprise whose value is the sum of hard assets plus current actual profits.
But it is not that simple. And there is no single formula to determine the benchmark valuation. The approach I call the Halas Business Assessment System [HBVS] combines several protocols to evaluate the business.
This hybrid approach allows valuations to consider not only revenue streams and own assets [especially for smaller companies, but can be a fundamental part of value]. The key to this approach is to use factors such as goodwill, cyclical business factors and excess income as adjustments to several valuation formulas.
As a point of discussion, I used our HBVS approach, with only hard data, no esoteric or subjective input, and three actual consulting firms of different sizes. Table 1 lists the side-by-side comparisons of the three companies.
1. Micro-niche, with a revenue of $200,000
In this case, the current owner has started to build business more than 30 years ago. Currently with five employees [partial and full-time], the owner has built a good reputation with hundreds of clients and is now seeking retirement. In fact, deceleration has begun, and owners are more willing to accept "guidance" than to participate in daily work. Owners' perceptions of business value are centered on reputation, industry experience, established relationships, and real estate that companies are gradually gaining.
For this company, our different valuation formulas generate values from $220K to $477K, with a mixed value of $333K. Due to modest income and profit, the final value is only slightly better than the value of commercial assets. In the owner's own words, "this approach is a good basis for new owners interested in business development. Its revenue can be doubled with minimal effort."
Like many small-owner-operated companies, the company may not be valued based on the owner's perception. This is usually due to the owner's estimate of the value of knowledge attributed to the customer list and the value of compensation and relationships. Unfortunately, like any service business, these customer relationships are only valuable if they are active and generate profitable revenue. If he/she is willing to "beat the bushes" for the new mission, this is indeed a great opportunity for the next boss.
2. Small and medium-sized generalist company, with a income of 2.5 million US dollars
The company was founded decades ago and now serves hundreds of customers in a wide range of industries. The company currently has 17 employees and its services include attitude and opinion surveys, operational skills improvement programs, company policies and culture. This is a true general counseling business, but it is very well managed. The CEO is a practicing consultant and is often employed.
Using the same approach, the valuation ranges from $22 million to $3.9 million, with a balanced industry weighted value of $3.4 million. In this example, the actual profit is exceptionally healthy and produces an excellent estimate. The company embodies the old investor axiom: "Is it better to buy a company that has $700,000 in assets and generates $300,000 in profits, or a company that has $300,000 in assets and generates $700,000 in profits?" In this case, this advisory group is a shining example of how to use appropriate market planning, the use of customer lists, and of course human resources.
3. Medium-sized niche company with a revenue of $17.5 million
This is a well-positioned niche company that provides consulting services for a single large industry. The current staff number is 108 and many jobs are international. The company offers a comprehensive range of services and maintains a good reputation in its niche market. Its CEO is also a practicing consultant, directly involved in customer tasks. When discussing value topics, he emphasized reputation and human assets. The company's management style is dedicated to serving its customers while providing its employees with an average quality of life.
Here, the four valuation methods yield values ranging from $6.6 million to $9.8 million, with a balanced industry-weighted value of $8.7 million, which is about 0.5 times the return.
Inspiration
This exercise emphasizes the practicality of a non-subjective business evaluation system as a consistent and comprehensive approach to determining the market value of a consulting firm. Financial performance and assets will not be affected. In the context of this article for the three companies, their recent performance period contributed to the ultimate value of these sample companies. After evaluating thousands of companies for more than 20 years, we found that the hybrid approach is the best because financial valuations are not necessarily related to the size of the company. If you have to apply a wide range of brushes, an all-encompassing approach, consider using a multiplier of 4 to 7 times the benefit. However, getting real income is often difficult and frustrating. In general, P&Ls does not provide a complete picture.
in conclusion
In many cases, management consulting firms have unique attributes such as knowledge assets, a high-quality customer list, and an in-depth understanding of key industries or markets. These factors are important and the seller or buyer can use these factors to adjust the benchmark valuation.
Information-based systems are used as baselines, centered on actual and insightful data. Subjectivity can work, but only the level of price generated by financial inputs is fair to motivated sellers and willing and qualified buyers. More simply, when the price-earnings ratio is in their teens, it is difficult to be excited about the market. Need us to say more.
Orignal From: Consulting company valuation - hybrid approach
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