Professional services firms: Data to enhance valuations

BVWireIssue #73-5
October 29, 2008

Client relationships are paramount—or so says data outlined in Top Dollar: How to Achieve Premium Valuation for Your Professional Services Firm, a recent survey of business valuation experts conducted by Hinge, Inc., a Reston, Virginia-based consulting firm. The surveyors—who interviewed both acquirers of professional services firms and BV experts—found that the following factors (ranked in order of importance) are key to coming in with premium valuations:

1. Strength of existing client relationships. Survey respondents note that factors at play typically include such “intangibles,” as the length and quality of the relationship.
2. Technology. The surveyors contend that for, “firms that possess a truly proprietary process, or to a lesser extent, patents or intellectual property, there is a greater prospect for a premium valuation. Technology, however, must produce a true market advantage. It can’t be a generic process or an easily duplicated software solution branded with a clever name.”
3. Quality of management team. Among other things, the data show that the possibility of retaining talented senior management adds value. Interestingly, respondents didn’t see the presence of rainmakers as having a positive impact on value. Why? The sense is that clients are more loyal to those who brought them in than they are to the firm itself.
4. Marketing strategy. Value-added considerations included: a unique niche or specialization that is sustainable over time; a defensible competitive advantage; and a niche that fills a void for the acquiring firm.
5. Financials. Respondents rated the quality of earnings highly, yet they told pollsters that believable and verifiable projected growth rate is the “single most influential number” for premium valuations.
6. Employees. Why so low on the list? Every employer claims to have superior employees.
7. Profile/image. The surveyors concede that the low ranking of this factor may be misleading. Indeed, they add that “most managers of professional services firms recognize that key elements of brand, such as reputation and marketplace visibility, are essential to maintaining future growth.”

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