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Consulting Company Valuation Model

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How to calculate the equity value of a consulting company

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Consulting Company Valuation Model

  1. 1. A quick guide to consulting company valuations and the levers you can pull to add more profit and equity value to your business © Equiteq LLP
  2. 2. Your big question…“What is my firm worth?” In very simple terms your consulting firm is worth a multiple of the last 12 months profit (technically called the EBIT Multiple). However… Just like selling your home, its saleability and the final price paid will be dependent on how its face value is impaired or enhanced by things like structural issues and other risks, market demand and just how hungry any one particular buyer is to get their hands on your company for reasons personal to them! 2
  3. 3. Your firm could be worth anything from 0, to the average 7-10 times profit in today’s market, up to 30 at the top end Think of your profit and apply a multiple. You would like the multiple to be bigger wouldn’t you? You can achieve a higher equity value by using the things within your control, so let’s take a look at the valuation process and identify the 8 levers you can pull to enhance the saleability and value of your firm 3
  4. 4. There are FOUR independent, variable factors in the equity valuation of a consulting business Growth The profitability and growth track History record of your business Future Will profit growth continue into the Risk future? The mission critical factor Market The current M&A market demand for Premium firms in your sector of consulting Synergy How important the acquisition of your Premium firm is to any one particular buyer 4
  5. 5. These factors are used in a formula to arrive at a profit multiple (worked example for the ‘average’ firm sold on the M&A market today with say $450k of EBIT) Growth History Face Value 7 RESULT Profit Multiple Future x 0 to 1.0 0.8 9.24 Risk MISSION CRITICAL Valuation Market x 1.0 to 1.4 Premium 1.1 $4.158m Synergy x 1.0 to 2.0 1.5 Premium 5
  6. 6. What can you do to increase equity value? Growth What’s done is done, good or bad! If History bad, build for the future! Future It is upon this that almost everything Risk rides…see next slide for 8 levers Market Sell now or later trade-off, plus Premium market knowledge for your segment Synergy Careful targeting of many buyers plus Premium quality presentation of value to each 6
  7. 7. Future Risk – The 8 Levers of Equity Value There are 8 key areas of risk that a knowledgeable buyer will evaluate, we call them the ‘8 Levers of Equity Value’. If you know where you stand, you can either mitigate the risks or build each lever for the future Each incremental improvement reduces risk, increases profit potential and equity value High Quality/Low Risk Improving Low Quality/High Risk 7
  8. 8. This company achieved a compound annual growth rate of 67% and increased its equity value from 3.3 times profit to a multiple of 12 upon sale in 2008 Initial Valuation Within 3 Years By working on each lever to reduce risk and increase profits 8
  9. 9. In summary… Your firm is worth a multiple of the last 12 months profit, something between 0 and 30 times EBIT The mission critical factor to the multiplier is the risk assessment on whether profit growth will continue Using the 8 levers model for growth planning, you can establish an exit strategy, build higher profits, reliable cash flow, and more equity if you plan to sell in the future If you plan to sell sooner rather than later, then an 8 lever assessment can bolster your negotiating position and help you to mitigate the risks of buyers walking away 9
  10. 10. Further Resources The European More on the 8 Consulting lever benchmark M&A Report and how it helps profit growth & sale Free advice and For general information on enquiries contact growth and exit Tony on: Tony Rice +44 (0)1252 724264 equity-club 10
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How to calculate the equity value of a consulting company


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