At Hinge, we’ve spent quite a bit of time researching the drivers of growing professional services firms. In particular, we’ve researched the role that reputation and visibility can have on brand strength. Given a strong brand, what’s the relationship to a firm’s valuation?
To answer that question, we invited Michael O’Brien, Principal at Rusk, O’Brien, Gido & Partners to bring insight to the topic. Michael and his colleagues provide business planning, valuation, ownership planning, and mergers and acquisitions strategies to A/E/C clients.
Those who have been in the industry for decades will recall the market collapse of 2007 and 2008. Post collapse, many firms have not regained the level of value experienced in prior years. Add to this the many firm owners who are still looking to drive up firm value in preparation for retirement. For some owners, they may even fall prey to the mythical formula of “Earnings x X = firm value.”
The key element to consider when determining a firm’s market value is the expected future cash flow. And to enhance a firm’s value, a firm needs to regularly conduct risk assessments to determine the things it does well and the things that it does not do as well.
There are two parts to a firm’s value: tangible value and intangible value. Book value has to do with tangible concerns such as cash, accounts receivable, fixed assets and equipment (machinery, computers, software). In essence, the book value looks back at what has already been done. On the other hand, intangible value has to do with existing workforce, contracts, customer relationships, patents, trademarks, business methodologies and trade/brand name. It’s no surprise that in professional services, the greatest asset are the people.
In determining valuation, the higher the tangible value, the lower the risk associated with the firm. So, what drives value? Things such as the stability of the firm’s operating performance, growth prospects and risk management can drive value. However, growth does not equal minimized risk. Firms that have a high concentration of customers, a market sector concentration or inconsistently high profit margins can be considered high risk and thus can garner a lower value. To manage these factors, firms that are looking to increase their valuation can become more bottom line focused and can pursue market diversification.
Professional services firms pursuing high valuation also focus on consistency in service delivery and quality controls to ensure a consistent brand experience. That consistent brand experience starts with messaging. Firms with higher valuations are deliberate in their actions, including how they communicate in print and online. Their communications are driven by a strong marketplace positioning built on differentiators that are true, demonstrable and highly relevant to target audiences.
For more on the relationship between a strong brand and your firm's value, check out our webinar with ROG + Partners.
To learn more about identifying differentiators, download our brand new Differentiation Guide for Professional Services.