In recent months, M&A and valuation interest in professional service firms have been increasing. Until now, relatively very little is known about the importance and value of brand names for these types of firms. The exhibit below illustrates typical royalty rates and trademark values found in the transactions of 18 different accounting and law firms between 2006 and 2016, according to data from MARKABLES, a Switzerland firm that has a database of over 8,200 global trademark valuations published in financial reporting documents of listed companies.
A secondary asset: The price-to-sales multiples paid for professional service firms are typically in the range of between 1.5x and 2x revenues. It is obvious that the brand name plays a secondary role. There are primary assets to consider first. Customer relationships depend on the nature of the business. Repeat business, such as annual audits, ongoing bookkeeping, or IP administration and management, means high customer value. On the other hand, project-related business such as advisory or litigation support indicates a higher reputational and brand value. Of course, key people are another element to consider. If key people leave the firm, will their clients and business stay with the firm or will they take it with them?
Depending on the nature of these primary assets, the brand name is more or less important. Accordingly, the data show trademark royalty rates between 1% and 2.5% and brand names accounting for 5% of firm value on average. An analysis of remaining useful life (RUL) is also worth noting. Over 50% of acquired firms have finite and rather short RULs, which means that the acquirer intends to replace the firm’s name in the near future.
The upshot here is that project-based professional services firms in particular should focus on both their reputational value and on key advisor retention to increase their value.
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