Take Five #184: “Valuation Methods for Professional Services Firms,” and more
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Take Five #184: “Valuation Methods for Professional Services Firms,” and more
1. Home services scale when technician performance and brand credibility merge and mature together
2. Searcher-turned-owner’s take on what’s changed (and what’s stayed the same) in ETA in recent years
I stumbled my way through for +11 months trying to understand how deals were structured and find one worth buying. I talked to a few accounting firm owners I knew about trying to buy a firm and a few told me not to do it. Then I cold DM’d a guy named Sam Rosati and he told me to reach out to his buddy Mike Jerman – one of the first real enthusiasts for my plan because Mike had been part of dozens of accounting acquisitions. I also got connected to Shannon Hay – a banker who specialized in accounting firm deals and helped me with typical deal structures. Looking back now there were so many random connections and friends of friends who helped get the info and guidance I needed to keep moving to the next step. (Thanks all!)
But I still struggled to get in front of any good deals because the business brokers for accounting firms wouldn’t talk to me as a non CPA. So then I put together a list of targets to cold email and struck gold with my first email send – a perfect deal for me that was 100% bookkeeping with $800k revenue and $180k SDE. I thought I was on my way to glory – and then that deal fell apart a few weeks before closing. I was searching nights, weekends, and early mornings while working a lot. Plus we had 2 young kids living in peak quarantine. Only a handful of people in my life knew I was trying to buy an accounting firm. Around that time stuck at home I also got back into Twitter and found the small business community fascinating.
I was in the lonely, draining marathon that is searching to buy a business. I had one deal fall apart at the very end, and a lot of other deals looking like bad fits the more I dug in. I was getting down to the end of my list of firms to reach out to. It was fall 2021 and I knew if I didn’t find an acquisition before year end I’d have to wait until after tax season. With my last batch of 70 emails I suddenly had 2 good targets in New Hampshire…and by this time I’d seen enough bad deals to know what a good one looked like so I pounced. And I probably overpaid – C’est la vie in ETA. We closed December 31, 2021 and the real work began.
Read Patrick Dichter’s post here.
3. “Valuation Methods for Professional Services Firms”
Comparison of Valuation Methods
Valuation methods each have their own strengths and are suited for specific scenarios. Knowing when and how to apply these approaches - and combining them effectively - can make all the difference in accurately determining the value of a professional services firm. Each method brings unique insights that, when integrated, create a more reliable valuation framework.
The income approach is ideal for firms with a proven track record and consistent financial performance. This method focuses on the firm’s future earnings potential. On the other hand, the market approach compares the firm to similar businesses that have been sold recently. This method reflects current market trends and is relatively straightforward when reliable comparables are available. However, finding truly comparable firms and accessing credible transaction data can be tricky. Tools like Kumo simplify this process by aggregating business listings and transaction data from various sources, helping users identify relevant benchmarks.
The asset-based approach calculates the firm’s net asset value, offering a conservative valuation baseline. While easy to apply, this method often underestimates the value of professional services firms, which rely heavily on intangible assets rather than physical ones.
4. Buyers often contest earnouts because there’s zero downside in pushing payments lower
5. Interview: A platform approach to software M&A turns legacy brands into long-term compounding assets
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