We get involved in valuations of consulting companies for several reasons. Often the stimulus for a company sale starts with an understanding of the value of your firm in the current market. As market conditions change from year to year, timing of a disposal can make a dramatic difference to the price achieved for any firm. Some firms however are just interested in the current value in order to create the benchmark for value improvement over the coming years. Equiteq not only works on sale and acquisition transactions. We help firms grow equity value over the long term ensuring that they achieve their target value for disposal as fast and as painlessly as possible. Our valuation methodology not only calculates a current value but it also makes the link between cause and effect on company value. As you will see this goes well beyond just an understanding of the financials.

Calculating your equity value as an EBIT multiple

Our valuation method is a 4-step process that starts by assuming that your firm is the average firm in our sector that was sold in average market conditions over the past 5 years to the average buyer. Of course your company isn’t the average firm, so we then adjust that value up or down depending upon your financial profile, your investment risk profile, current average market conditions and our view of the buyers’ appetite for your firm if it was on the market today.

Our consulting industry M&A database rovides us with a lot of the base data used in the valuation process. The data is 50% historical information on previous M&A deals in the industry and 50% company information, inclucing financials, sector and service expertise profile of all firms in the UK and other places across the world.

These 4 steps are as follows:

1. Financial Analysis

We look in detail at your historical and projected financials. We make adjustments for any one-off expenses that could be argued as not part of normal trading costs. We also adjust for abnormally high or low compensation levels. We calculate the year on year growth in this ‘adjusted’ EBIT and assess your ability to generate free cash flow from profits in a sustainable way. We then apply a multiple to this adjusted EBIT to generate an investment return commensurate with the risk profile for the average consulting firm.

2. Equity Risk Assessment

We use our ‘8 levers of Equity Value' model to determine if there are any risk factors associated with your firm that would make it a worse or better than average investment opportunity as compared with the average for the industry. For example, under the section ‘Quality of fee income’; if you could demonstrate long-term contracts with clients then you would have a lower risk profile than most consulting firms; alternatively if more than 25% of your fee income was with one client and with no long-term contract then we would judge you to be higher risk than average. This would affect your score in this segment of our equity value wheel and may increase or decrease the multiple applied to your EBIT in calculating value. The 8 segments of the wheel are based on extensive experience and research into those factors that buyers assess when looking to value a consulting firm. We review them regularly to make sure they represent the current reality of buyer sentiment re acquisitions. This latter point is important because buyer sentiment does change over time. For example, even 5 years ago, it would have been difficult to get a good price for a consulting firm where 50% or more of its consultants were freelancers or ‘associates’. Today this resource profile is seen by many buyers as attractive because it infers an ability to reduce costs fast – and thus protect earnings - if the market takes a downturn.

3. Market Premium

The EBIT multiple used in step 1 assumes average market conditions. We hold data on multiples in our sector going back to the year 2000. We have also correlated this data with general market data going back 75 years. At any point in time we are able to calculate a discount or a premium to the market average. Currently we are experiencing a premium of 40% and it is fair to say that it is a seller’s market for consulting firm owners in the UK at present.

4. Buyer Synergy Premium

So far all of our calculations are independent of the type or specific buyer. However the price premium associated with finding the right synergistic buyer can swamp any premium associated with your growth, profit levels or even market premium. We have seen synergy premiums of 400% and so it really does pay to research the right buyer for your firm. Buyer synergy means that you have persuaded the buyer that your firm can grow their firm faster than it could grow without you. In these circumstances the investment return calculation becomes more than just based on your financial forecast. You are selling the story that together ‘2+2=5’ so that the buyer can justify paying a higher multiple of your profits to get this joint growth. It is in this area that Equiteq excels at both the valuation stage and of course when we manage the sale transaction due to the comprehensive nature of our database described above. At the valuation stage we are able to assess the likely population of buyers for the combination of your client/market sector experience and your service line skills. We calculate a ‘buyer synergy premium’ based on this data which indicates the relative attractiveness of your firm to the potential universe of buyers.

The resultant valuation from the above 4-step process gets as close as you can get to a target price based on actual deals done in our sector, comprehensive sector market data and the experience of hundreds of buyers of consulting firms.