The 4 key levers that create great capital value for a company

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VSBuilding great capital value for a professional services business is usually one of the primary goals of owners, as they most often view their business value as a critical part of their own financial independence.

Building a profitable business is obviously essential, and it is a more valuable profitable business if a large portion of the income provides continuity for any potential buyer. Of course, almost everyone benefits, hence the focus on increasing revenue from renewal commissions or setting ongoing fees for service or consulting contracts with clients.

This is the first key lever that increases the value of a company’s capital: predictable income.

The more certain a future income stream seems, the more it is generally valued by an investor. A business that depends for its revenue on the key business skills of a handful of rainmakers simply does not have the same predictability of future revenue as a business where customers hold ongoing service contracts with the business through example.

The second big lever is reliable experience. The customer experience with the business in terms of the type of advice or service they receive, and the consistency with which it is provided, the positioning and branding of each customer interaction creates certainty for customers. In certainty there is familiarity, which leads to trust and a constant sense that expectations are being met. This seamless customer experience leads to greater customer retention and, if done well, it also leads to higher ongoing customer participation in company services. Thus, reliability allows customers to stay longer and do more business with the company. It’s worth paying a little more if you’re buying a business, isn’t it?

How transferable is the business? If extracting capital value to fund the retirement of current owners is a goal, one of the key valuation considerations should be “how easy is it for someone else to step in and to run this business and achieve the expected business performance?

Staff contracts and culture, IT and customer management systems, consulting or service systems, prospecting and marketing methodologies….these are all examples of areas where significant obstacles (or value detractors) can be found. ….or where major improvements in practice capital value can be created. Savvy business buyers will pay particular attention to the ease of transferring ownership or integrating into another business, and their view of business value will be adjusted accordingly.

The last of the big levers driving higher value for professional services firms is whether the business has the potential to be repeatable. Of course, not all commercial buyers necessarily want a practice that can span multiple locations or markets, but the ability of systems and intellectual property to be duplicated and repeated elsewhere is attractive to a buyer. We have often seen institutional buyers of advisory practices over the years, and it is this 4th key lever that often drives the deal. The ability to take a set of successful systems and apply them to other business units can be the most valuable asset of a professional services firm.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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