Many of these things will increase the value of your ownership in an external, or even internal, transition.
If you are an owner of an AEC firm and hope that your company or your share of ownership is going to be worth a lot of money some day, you need to constantly keep the things that can increase the value of your equity top of mind.
The difference in entrepreneurship versus plain old small business is this idea that you can build a pot of gold at the end of the rainbow, and that the financial rewards you can earn from your business are greater than just what you can extract from it every year.
Certain things DO increase value if you plan to sell externally. Truthfully, these are many of the same things that will also increase the value of your ownership in an internal transition. Let’s take a look at some of these:
- Revenue growth rate. This is number one. If you have a firm that is rapidly growing – be that through internal growth or mergers and acquisitions – it will increase its value. Over the years many people questioned our consistent focus on firm growth here at Zweig Group. This is one of the reasons for it. Growth in top line revenue is far more important than your historical EBIT (earnings before interest and taxes) to value creation. It impacts your projected EBIT dramatically. And while some people try to make a distinction between internal growth and acquisition-related growth, most buyers will not. If you prove you can grow by acquisitions and successfully integrate those companies, that is seen as a very valuable core competency that can be leveraged.
- Profitability. Yes, profitability is important. Yet, my experience is your valuation from an external buyer will never fully recognize extreme profitability, nor fully penalize a lack of profitability. Right or wrong, most buyers will assume that your extra high profitability is a reflection of a lack of investment in your company – in training, IT/systems, or marketing – and they will have to make those investments if they own your firm. If you aren’t very profitable, they will also assume that they can fix that through cost cutting or raising fees or other things that you haven’t been able to do. So it’s more than just a simple multiple of EBIT that your value will be based on.
- Strength in management. Buyers want companies that have management depth far beyond the founder or CEO. This reduces their risk. Having viable candidates to succeed each of the top people are crucial. Strong people in every role, with identified successors who are being prepared to take over the roles of their superiors is a significant value addition. And believe me, all of this will come out during the buyer’s due diligence.
- Audited financials. Having super-clean books with no co-mingling of personal expenses and business expenses is important to the risk reduction efforts of any potential buyer. They want to know that your revenue accruals are accurate, assets and liabilities are all accounted for accurately, and that there are no shenanigans that have been performed that misrepresent your true financial picture. The longer your history of audited financials, the better.
- A strong brand. Having a company that is widely recognized by your target clients and well-thought of is important to your value. It’s importance is linked to the firm’s ability to withstand variable economic conditions as well as survive the comings and goings of key people. It is also seen as something that can be leveraged as a means to increase future revenue growth and get better clients (and fees).
I could go on here but am out of space. There are a number of other ways to increase value – a great client database, historical information on the performance of your projects once built, ability to secure higher than average fees, being in the “right" markets and locations, lawsuits or other unresolved liability claims, and more, but those will have to wait to be addressed in future articles!
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com.
