The Relationship Between Valuation & Marketability

PSMJ Resources, Inc.
Posted on: 10/22/15
Written by: PSMJ Resources, Inc.

planning-out-an-incentive-compensation-program-requires-careful-budgetin_1022_468127_0_14065532_500-1If you are the owner of a small A/E firm that has maintained revenue growth and decent margins through the recession, now is an excellent time to think about selling the firm. However, your ability to do so will be greatly impacted by the things you have done to continue to thrive over the last two years.

You should look very critically at the sources of your firm’s revenue and profits and ask, “Is my system transferrable to another firm?” Can another firm utilize the things you have in place to continue to be successful? Or is your success a product of special circumstances that are dependent upon you?

Looking only at free cash flow, your firm may appear to be very valuable and marketable, but if your business cannot be integrated effectively into a larger firm, this lack of marketability will destroy the firm’s value. 

We recently talked with a small water/waste water firm in a remote part of the western United States that touted 2009 as their best year ever. They had a stable client base that continued to give them enough projects to support the modest operation. They did little or no marketing but produced good profits—
around 20%.

When the owner wanted to investigate a sale of the firm, it took no time at all to recognize that they were already over-achieving in their geographic market, and furthermore, had developed a culture of introverted technical expertise that looked at growth as the downside of being good at what they do.

This firm was providing a very nice life for its owner but had very serious marketability issues. An acquirer would get good cash flow by buying this firm but integrating the operations to achieve growth targets would
have been a nightmare.

Three potential buyers looked briefly at the firm before declining to make an offer—the outside sale value of the firm was virtually nil. However, the firm had significant value to the next generation of engineers (after all they didn’t have to do any marketing) and we were able to create a plan for the internal transfer of ownership that was less than the owner wanted but much more than liquidation value.

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Brad Wilson joined PSMJ as a consultant in 2002 as one of the senior M&A consultants. Since, Brad has facilitated both the purchase and sale of A/E/C firms of all types and sizes. Brad will lead Avoiding the Million-Dollar Mistake: Winning Strategies for Today's M&A Climatea preconference session at the PSMJ's 2015 Industry Summit, held December 2-4 in San Francisco.

Learn more now!

 

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