How to calculate the equity value of a consulting company

1. A quick guide to consulting company
valuations and the levers you can pull to add
more profit and equity value to your business
© Equiteq LLP

2. Your big question…“What is my firm worth?”
In very simple terms your consulting firm is worth a
multiple of the last 12 months profit (technically
called the EBIT Multiple). However…
Just like selling your home, its saleability and the final
price paid will be dependent on how its face value is
impaired or enhanced by things like structural issues and
other risks, market demand and just how hungry any one
particular buyer is to get their hands on your company for
reasons personal to them!
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3. Your firm could be worth anything from 0, to the average
7-10 times profit in today’s market, up to 30 at the top end
Think of your profit and apply a multiple. You
would like the multiple to be bigger wouldn’t
you?
You can achieve a higher equity value
by using the things within your control,
so let’s take a look at the valuation
process and identify the 8 levers you
can pull to enhance the saleability and
value of your firm
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4. There are FOUR independent, variable factors in the
equity valuation of a consulting business
Growth The profitability and growth track
History record of your business
Future Will profit growth continue into the
Risk future? The mission critical factor
Market The current M&A market demand for
Premium firms in your sector of consulting
Synergy How important the acquisition of your
Premium firm is to any one particular buyer
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5. These factors are used in a formula to arrive at a profit
multiple (worked example for the ‘average’ firm sold on
the M&A market today with say $450k of EBIT)
Growth
History Face Value 7 RESULT
Profit Multiple
Future
x 0 to 1.0 0.8 9.24
Risk
MISSION CRITICAL
Valuation
Market x 1.0 to 1.4
Premium
1.1 $4.158m
Synergy
x 1.0 to 2.0 1.5
Premium
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6. What can you do to increase equity value?
Growth What’s done is done, good or bad! If
History bad, build for the future!
Future It is upon this that almost everything
Risk rides…see next slide for 8 levers
Market Sell now or later trade-off, plus
Premium market knowledge for your segment
Synergy Careful targeting of many buyers plus
Premium quality presentation of value to each
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7. Future Risk – The 8 Levers of Equity Value
There are 8 key areas of risk
that a knowledgeable buyer
will evaluate, we call them the
‘8 Levers of Equity Value’. If
you know where you stand,
you can either mitigate the
risks or build each lever for
the future
Each incremental
improvement reduces risk,
increases profit potential and
equity value
High Quality/Low Risk
Improving
Low Quality/High Risk
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8. This company achieved a compound annual growth rate
of 67% and increased its equity value from 3.3 times profit
to a multiple of 12 upon sale in 2008
Initial Valuation Within 3 Years
By working on each
lever to reduce risk
and increase profits
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9. In summary…
Your firm is worth a multiple of the last 12 months profit,
something between 0 and 30 times EBIT
The mission critical factor to the multiplier is the risk
assessment on whether profit growth will continue
Using the 8 levers model for growth planning, you can
establish an exit strategy, build higher profits, reliable cash
flow, and more equity if you plan to sell in the future
If you plan to sell sooner rather than later, then an 8 lever
assessment can bolster your negotiating position and help
you to mitigate the risks of buyers walking away
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10. Further Resources
The European More on the 8
Consulting lever benchmark
M&A Report and how it helps
profit growth &
sale
www.equiteq.com/report www.equiteq.com/ega
Free advice and For general
information on enquiries contact
growth and exit Tony on:
Tony Rice
+44 (0)1252 724264
www.equiteq.com/equiteq-
equity-club tony.rice@equiteq.com
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