Selling Your Consulting Business – What’s it worth?

Over the last couple of years, myself and several colleagues of my generation (i.e. older but certainly not ancient) have been discussing and contemplating retirement. For those working in government and some larger companies; it’s fairly simple – reach a certain age or years of service and collect your pension, perhaps even an incentive for an early buyout. For independent operators, sole proprietors, personal corporations, and many owners of small consulting firms (like myself) ; it can be much more complex. Some of my colleagues enjoy their work so much, and/or need the income, that they plan to work as long as humanly possible. Others are tired, or have had enough and want out of the rat race completely. Some folks, including me, still like our work overall, but want to do less and less of it; and try to partake of more and more non-work activities while we are still young and healthy enough to enjoy them – with the end goal of eventually divesting our companies. This planned divestiture involves a lot of tough but critical questions and choices. What is my company worth? Do I/can I sell my company? Who can I sell my company to? What about my employees and clients? Is there a succession plan in place?

A while back I attended a very informative webinar, put on by Scott Duke of Opn Road (www.opnroad.io), an expert in mergers and acquisitions, especially for environmental and engineering consultants. Scott helped me understand some of the basics of evaluating and selling your (environmental) consulting business. I will do my best to summarize some of the basic concepts for the owners of small-to-medium size consulting firms, as they start contemplating retirement and possible divestiture.
Let’s start with figuring out what your company is worth – beware what you think or hope it is worth may differ greatly from the actual market value. There are lots of variables and intangibles, but one of the basic concepts in evaluating company value is calculating the EBITDA - short for earnings before interest, taxes, depreciation, and amortization. This is one common measure of core corporate profitability used to assess profitability and financial performance. EBITDA is calculated as Net Income (i.e. Operating Income minus non-operating expenses such as taxes and interest) + Taxes + Interest Expense + Depreciation + Amortization; or alternatively Operating Income + D & A. Both formulae deliver basically the same result. It is common to use a 5-year weighted EBITDA to derive a value that reflects the more recent corporate financial situation (i.e. calculate the annual EBITDA for the most recent 5-year period, assign a 5x value for the current year, 4x for the prior year, and so on; then calculate the weighted annual average).

Once you and your accountant have calculated the EBITDA based on data from income statements, cash flow statements, and operating notes for profit and loss; your company value can commonly be determined using the EBITDA times a multiplier that is mutually agreed upon by the buyer and seller. Calculating EBITDA is fairly straightforward, however determining an acceptable multiplier can be very difficult and can range from very profitable double-digit multipliers, to less desirable fractional multipliers. The multiplier dependent on many variables such as company size and profitability, client and project portfolio, receivables, employees, market share and sector, and the objectives of both buyer and seller.

Future blogs on this topic will explore the various stages of business sale-ability, and methods to add value to your business prior to a potential sale.

By: Bill Leedham, P. Geo., CESA
Bill is the Head Instructor and Course Developer for the Associated Environmental Site Assessors of Canada (www.aesac.ca); and the founder and President of Down 2 Earth Environmental Services Inc. You can contact Bill at info@down2earthenvironmental.ca