Value, Quitters, and a Boom Economy

Mar 09, 1998

This week, you get three topics for the price of one. What makes for value? An article in the February 21 edition of The Boston Globe under the headline “Internet ad company stock gains 57% on opening day,” caught my eye. I learned that DoubleClick, Inc. had a market value of $424 million, based on revenues of only $30.6 million and a loss of $8.4 million in 1997. In 1996, the firm had revenues of $6.5 million and lost $3.2 million!!!! If these numbers don’t get you thinking about the value of your firm, nothing will. Frankly, I find multiples like that mind boggling. If this is at all typical for how Wall Street values companies traded on the open market, then there can be little doubt that a day of reckoning will be forthcoming. Clearly, there’s a good possibility that this crazy value can be attributed to this particular firm’s “Internet” focus. But I think the real reason the market places such a high value on this company, despite its inability to make a profit, is its revenue growth rate. It’s stratospheric. And just about everyone assumes that someday all that revenue is going to result in a big profit— not to mention one that has a lot of ability to get even larger. I have been saying for some time that firms in this industry better get focused on growing their revenues. Yet, all I see most appraisers, financial consultants, and management consultants talk about is profits. Most stock buy-sell agreements don’t even consider revenue in their valuation formulas. It’s either based on book value or book plus some average or weighted average of profits. Our most recently published survey, the 1998 Valuation Survey of A/E/P and Environmental Consulting Firms, proves, without a doubt, that even in this industry, firms with more rapidly growing revenue streams are valued more highly than those that are flat or declining. In just one of many measures supporting this, fast-growth firms were valued at 46% of net service revenues, whereas stable firms were valued at 41% of revenues, and firms on a slow decline were valued at only 19% of revenues!! Even growth projections make a difference in value (see chart at right). Firms with revenue projections for growth were valued at 43% of net service revenues, whereas those projecting flat or declining revenues were valued at only 32% and 31% of net service revenues, respectively. What do you say when an employee quits? Michael Bloomberg, founder and CEO of Bloomberg, Inc., just says, “O.K.” This is just one of the quotes from Bloomberg from an interview that appears in the March 1998 issue of Inc. magazine (beginning on page 55). Inc. is, in my opinion, the best management publication for owners of professional services firms— other than The Zweig Letter, of course! Bloomberg adds that loyalty is everything, and he never permits a going-away party for a departing employee, never asks why an employee is leaving, and if he can, even avoids shaking their hand. He considers everyone either “us” or “them,” and when you leave, you become one of “them.” The article adds that Bloomberg never rehires a former employee, even a good one. Bravo, I say! Michael Bloomberg and I have exactly the same philosophy. I agree with him 100%, with one minor exception. I might ask why someone is leaving. But like Bloomberg, I may not care unless there are mass defections. Otherwise, it’s just one person’s opinion. I say, get the cancer out as soon as possible when it comes to someone leaving for a “better opportunity.” You turn your notice in, and “Bye.” No parties, no big farewell, no good luck wishes. All that stuff does is send the wrong message to the good, loyal people who stay with your firm. Someone who quits is no longer on our side! If you or your partners are soft on this issue, buy the March issue of Inc. and check out this article. It just may change your mind. How long will this boom economy last? Times are good. So good, in fact, it’s almost hard not to make money as an A/E/P or environmental firm today. The July 1997 issue of Wired magazine (yeah, I am a little behind on my periodical reading!) has a great article on “The Long Boom.” Basically, the article claims that we are about five years into a 25-year boom of nothing but good times, based largely on two things— changing technology and a “new ethos of openness.” Sounds good to me. Personally, I do believe we have another 5-6 years left in these great times for our industry. On the other hand, when I moved from Texas to Massachusetts in 1987, I heard some of the same stuff from the people who got here before me. “We’re insulated from the rest of the economy;” or “Our region is much more diversified than the rest of the country;” or “It won’t impact us— we have more educated workers who can adapt.” Yet we got ours in the late 80’s and early 90’s when the lending crisis was going full-steam and the defense and high-technology industries cut back. My advice is to hope for the best but prepare for the worst (I can’t remember who said that!). The economy is strong, and it’s hard not to be super optimistic as a business owner today. But most people who have been in business for decades longer than we would say, “Get ready for the next one. It always hits.” Originally published3/09/1998

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.