Your firm is not worth what you think it is, but what a buyer is actually willing to pay.
Every owner wants to know. I get the question all the time, and have for decades.
“Mark, what do you think my firm is worth?” I actually just had someone text me that question last night. But the fact is, I usually disappoint them with my answer: “It’s worth what someone will actually pay you for it.”
I’m not being a smart aleck. It’s just reality. I’ve been involved in buying companies, selling companies, valuing companies, financing companies, and helping other people do the same for more than 40 years. I have seen deals that looked fantastic fall apart over one small issue. I’ve also seen companies sell for prices that shocked everyone because one buyer saw strategic value that no one else recognized.
So let’s dispense with the mythology. Yes, there are many different rules of thumb. Every CPA, business broker, investment banker, and consultant has one. You’ll hear multiples of EBITDA, multiples of earnings, percentages of net service revenue, book value multiples, discounted cash flow (DCF) analyses, and enough spreadsheet gymnastics to make your eyes glaze over. They’re all useful until they aren’t. These formulas can establish a range and help you start a conversation. They cannot tell you what your company is actually worth because only the market can do that.
If one buyer shows up, you have one price. If 10 qualified buyers show up, you probably have another. If the economy tanks, interest rates jump, or your biggest client disappears the month before closing, your carefully calculated valuation suddenly becomes a historical document. Markets don’t care about formulas.
I constantly hear financial jocks confidently declare that AEC firms are “worth X times earnings.” Really? Tell that to the owner whose firm has one client accounting for 65% of their revenue. Or the owner who still signs every proposal, approves every invoice, hires every employee, and personally knows every client. Those firms may be profitable, but they aren’t nearly as valuable as their owners think. And I won’t even begin to get into what defines “earnings” here, other than to say I never trust that the financials of any privately-held business are accurate without a lot of digging into where those numbers come from.
On the other hand, I’ve seen firms with outstanding management teams, diversified clients, recurring revenue, and excellent margins sell for numbers that made people shake their heads in disbelief. Buyers pay premiums for quality.
Here’s something else owners often overlook. The price is only part of the deal, and sometimes it’s not even the most important part. I’ve seen sellers spend months bragging about the multiple they received, only to discover half their money depended on hitting earnout targets controlled by the buyer. Good luck with that. I’ve seen sellers finance a big portion of the purchase price themselves and then spend years worrying about whether they’d ever collect it. I’ve seen buyers insist on employment contracts, non-competes, holdbacks, indemnification provisions, and enough legal language to make the seller wonder if they sold their company or negotiated the end of a military conflict.
Meanwhile, another seller quietly accepted a slightly lower purchase price, got nearly all cash at closing, had limited post-sale obligations, and was sitting on a beach six months later wondering why everyone else made selling a business so complicated. Who got the better deal?
When you’re evaluating an offer, don’t obsess over the headline number. Ask yourself these questions instead:
- How much cash am I actually receiving at closing?
- How much of my purchase price is guaranteed versus contingent?
- How is the earnout accounted for and who controls whether it gets paid?
- How long am I committed to stay, and under what conditions?
- What risks am I keeping after I sell?
- How likely am I to collect every dollar I’m supposedly owed?
Those questions often matter more than another look at the EBITDA multiple. The irony is that owners spend years trying to maximize the value of their firms but often ignore the things that actually create value. Want buyers to line up? Build a business that doesn’t depend on you. Develop strong leaders. Build a brand through great marketing. Diversify your clients. Generate consistent profits. Produce healthy cash flow. Invest in systems. Create a culture people want to join instead of escape from. Do these things and you’ll have more buyers, more leverage, and better terms.
And remember this: Your firm isn’t worth what your accountant says it’s worth. It isn’t worth what your friend sold his firm for. It isn’t worth what some article or seminar says firms like yours should sell for. It’s worth what a willing buyer will pay a willing seller on a particular day under a particular set of circumstances. Everything else is just conversation.
 |
Mark Zweig is Zweig Group’s chairman and founder. Contact him at mzweig@zweiggroup.com. |