How And When to Calculate Your Firm's Value
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The idea of selling your creative firm some day might be far-fetched, but there are some surprising changes in the M/A (merger/acquisition) landscape recently that are upending decades of business as usual:
- Our earlier study pegging the likelihood of selling your firm at 0.25% still stands, but you can make just a few changes to increase that likelihood to about 15%. These changes are all recent, and they revolve around your positioning, firm size, service lines, and profitability (over three years, but with an emphasis on the most recent trailing four quarters).
- Earnout periods–the time you stay on under the new owners–have gotten much shorter. What was typically five years is now two or three, and individual principals can have differing earnout periods.
- Most buyers are not the traditional ones–one of the five holding companies–but instead are non-traditional buyers: large consulting firms, a team of internal employees, VC firms, or even your largest client.
This process starts by getting an idea of what your firm might be worth, using a valuation process in which we look at your firm as a buyer would. I’ve written a lengthy, detailed, and somewhat scientific explanation of our ReCourses Valuation Model, and you may want to download it below, whether you are ready to sell your firm now or not. The document will deepen your understanding of how firms are valued, and the 3,500 word treatise is arranged in a question and answer format to provide as much clarity as possible.
The illustration above pictures the interlocking nature of the sale price and the terms of the sale. The price consists of a precise accounting for your book value, which is then supplemented by a mathematical calculation of the value of your goodwill. That valuation determines the price, but then the price is paid according to various terms. The illustration assumes that 25% is paid in cash at closing, 45% is paid in a guaranteed note over three years, and the remaining 30% is variable based on mutually agreeable earnout terms. Every deal varies, of course.
More than 400 firms have gone through our valuation process, leading to more than 100 transactions. But why, again, is this worth thinking about? Your financial planning should assume that your firm won’t sell and that your “retirement” will be funded by the cash that the firm throws your way on a regular basis. But you should run the firm as if you are going to sell it, whether or not you actually do.
Running it that way will give you a different focus. You’ll make better business decisions, you’ll look at the right numbers, and you’ll craft your own role so that you are not as essential to how the firm runs on a daily basis.