How to Make the Best Valuation of Your Firm

PSMJ Resources, Inc.
Posted on: 03/05/19
Written by: PSMJ Resources, Inc.

Small architecture and engineering firms owners are likely to be fielding offers again. So if you've been thinking of cashing in, it may be a good time to get a valuation. Also, beware of low-ball offers.  

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Sellers: Increase the value of your firm

If you anticipate selling your firm, consider some steps that will enhance its value to prospective buyers.

  • Create an identity for the firm that is separate from any one individual.

  • Have a clear focus of activity and clearly defined markets.

  • Achieve an appropriate size to support a particular buyer’s strategy. (Revenues and profits must allow new owners to recoup their investment.)

  • Show consistent profit earnings.

  • Demonstrate consistent cash flow potential for the new owner.

  • Show a reliable amount of repeat work and clients.

How NOT to Value Your Firm

Do not value your firm using the following methods: 

  • How much the owner needs to comfortably retire. This has nothing to do with your firm.

  • Valuations more than two years old. Just because your design firm was worth $500,000 a few years ago, there’s no guarantee that it’s worth that amount plus inflation now. It may be worth more. Value is subject to current market conditions and past and potential profitability, not cost of living.

  • How much it would cost to replace the firm or build a new one. Replacement value is cost driven; firm value is market driven.

  • An offer from an outside buyer. Do your valuation first, then consider the offer.

  • How profitable your firm should be. Valuation is based on a combination of actual and potential performance.

  • How profitable you were 10 years ago. This is ancient history.

  • How much another firm sold for. Each seller and buyer is unique.

  • Book value. You’ll vastly undervalue your firm if you count on book value.

  • Rules of thumb. Guidelines like multiplier of book value, earnings multipliers, dollars per staff, and others can contribute to your valuation. But they don’t tell the whole story of what your firm is worth at this particular time to a particular buyer.

PSMJ_2019 M&A Icon-1In mergers and acquisitions (whether you are buying or selling), it is easy to make a million-dollar mistake. Ever wish there were a place where you could get the latest insight on how deals are coming together, hear war stories of what to watch out for, and get the tools and tips you need for M&A success? This is it! Way more than just a seminar, we've designed every ounce of the A/E/C Mergers & Acquisitions Senior Executive Roundtable to ensure that we give you an equal mix of learning and doing. This seminar provides  case studies, exercises, and real examples of valuation and deal structures on real M&A deals.

LEARN MORE

 

You also might be interested in these M&A related blog posts:

6 Ingredients For M&A Success

How prepared are A/E firm leaders to undertake M&A?

M&A Insider: Five Ways to Make Your Next Deal a Flop!

M&A Insider: The Pitfalls of Buyer Stock as a Transaction Currency


 

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