7 Keys to Attaining a High Business Valuation
We have all heard of companies that receive sky high business valuations. What makes these businesses so special that they can sell for many times the value of a competitor? We decided to find out.
Hinge interviewed acquirers of professional services firms and valuation experts across the country to determine once and for all what factors drive premium valuations. Quite frankly, some of our findings surprised us.
What is a Premium Valuation?
Premium valuations can be two to ten times greater than average. Firms that receive a high valuation are fundamentally different from average firms. One of our study participants put it best: “Valuation is driven by the expectation of future revenue.”
After we had completed all the interviews, we identified seven key factors that contribute to premium firm valuations:
- Strength of Existing Client Relationships
- Quality of the Management Team
- Marketing Strategy
Let's take a closer look at a few of these factors.
When we began the study, we had expected financials to rank high in importance. Instead, experts placed them in fifth place. Their reasoning goes like this: a company that seeks a premium valuation has to have tremendous potential for growth. And while that potential mustn't be contradicted by the financials, current earnings say little about what the future holds in store. Companies that can show consistent, strategic growth, however, are well positioned to command a top-dollar valuation.
Great management is critical. Somewhat counterintuitively, experts often look beyond senior leadership — who are likely to leave when they are paid off — and focus on middle management, who can provide critical continuity during an acquisition.
Any firm that seeks a premium valuation must be able to demonstrate it has a proprietary process that creates true competitive advantage. More often than not, technology drives this advantage. Valuation experts look for innovative ideas that can't be easily replicated by competitors.
Professional services firms are always touting the importance of their people. So why do employees score so low in the list? Valuation experts don't think most employees are true differentiators. Unless you can prove your people have valuable, independently verifiable skills (such as third-party certifications), your employees are unlikely to attract a lot of attention from valuation experts and acquirers.
Image ranked lowest in the list — not because it's unimportant, but because its equity is likely to be discarded in the acquisition. Acquired firms are typically absorbed into the parent brand. Their separate identity simply vanishes. This isn't true in every case, of course, but it accounts for the factor's low ranking.
For a deeper look at the issues that inform premium valuations — as well as practical advice for executives trying to build a premium firm — be sure to download the full study: Top Dollar: How to Achieve a Premium Valuation for Your Professional Services Firm.
How Government Contractor Valuations are Different
In addition to the seven factors that influence all premium valutions, government contractors are evaluated according to an additional set of criteria:
- Contracting vehicles in place
- Proportion of set-aside revenue
- Past performance / qualifications
- Employee security clearance
- Proportion of prime vs. sub-contractors
- Exclusively government vs. partial government
- Facility security clearance
For government contractors, marketing-related factors such as contracting vehicles and set-asides are more important to a premium valuation than other issues such as security clearances or the percentage of prime contracts they sign.
If you sell services to the government, a free special edition of the Top Dollar study that looks at your unique challenges and opportunities is available for download here.