Factors that Determine the Value of your Consultant Company

Oct 24 2018 · Entrepreneurship

Written by: Johan Haeger

Acquisitions are breaking new records in the consultant industry. But what is important to buyers, and what factors are included in the valuation of a consultant company? We have analysed the key figures.

Many factors and key figures influence the value of a consultant company and how attractive it is for a buyer. Below are some of the most important factors.

Turnover

The size of the turnover is often one of the most important factors for the valuation of a company, but it is at least as important to identify where the turnover stems from. A company that uses sub-consultants is generally not worth as much as a company where the turnover is derived from the entire delivery chain. Buyers want to know how much of the turnover stems from resource consultants, framework agreements, and commitments. Some companies also sell products and training that affect turnover.  One figure you can use to compare companies is the P/S figure (price/sales), i.e. the value divided by sales.

Profit

A company with high profits is obviously worth more. An important key figure when comparing company values is the P/E figure (price/earnings), i.e. the value of the company compared to the profit. For smaller companies, however, profit is not always a reliable key figure. Depending on taxation of salaries compared to dividends, or if the company wants to build their cash flow in order to grow, it is not unusual for profits to be “adjusted” up or down depending on what the owners decide to take out in salary.

Operating margins

How big is the company’s profit in relation to turnover? This is an important key figure that depends on utilization, hourly rates compared to salaries, overhead costs etc. An operating margin at over 10 percent is good, and if it is closer to 15 or even 20, it is really good. Compare Swedish consultant companies’ operating margins at Konsultkollen.

Skills

Many acquisitions in the last couple of years have revolved around niche specialist companies. In such cases, the acquiring party wants to bring in new skills to make their offering broader and better, or to become the market leader in a certain segment. Specialist companies are usually worth more than general companies.

Number of employees

When growing organically is difficult and when the competition for candidates is too fierce, an acquisition is a way to reach goals for growth. The number of employees can also be important in order to reach a certain level of capacity in order to take on bigger contracts and bigger clients.

Growth

A growing company is more attractive to a buyer. And the same thing is true for the opposite – a consultant company that has a declining turnover and number of employees is sending out glaring warning signals for buyers.

Brand

A strong brand that is well-known on the market is worth more per employee. A well-known brand often has an easier time attracting new recruits. It is evident on the stock exchange that some brands are valued higher than comparable companies.

Culture and staff turnover

Companies with a strong culture that maintains a low staff turnover are more attractive to a buyer.

Clients and industry

Getting new important clients or meeting a new client segment in a new industry can be crucial for the acquiring party.

Geography

Where is the company located and where is the turnover coming from? When a company seeks to establish their business in a new location or a new geographical market this might trigger the need for an acquisition and influence the price.

Competition

An acquisition can also be made to remove a competitor. This can lead to more business and to higher hourly rates.

Johan Haeger - Head of Enterprise Sales, Cinode

Johan Haeger - Head of Enterprise Sales, Cinode

Johan has extensive international experience within marketing, communications, sales and leadership. 7 years abroad in 6 countries has given him a strong passion for languages and relationships. Johan meets consulting companies daily with the goal of helping them become more successful. Time off is spent snowboarding, surfing, and hanging out with family and friends. https://www.linkedin.com/in/johanhaeger/

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