Valuing a Consulting Firm: A Comprehensive Guide

Valuing a consulting business is a tricky endeavor, as the annual cash flow of a small company is heavily dependent on the work of a few people. If those people stop generating new business, the company's value will drop significantly. When it comes to buying a consulting firm, most buyers expect the company's revenues to remain the same after the purchase, and the value of the firm will reflect that. Generally, trading brokers charge between 8 and 12% of the sales price, including inventory, depending on the size of the transaction.

The bigger the offer, the lower the rate. Earnings multiples usually range between 6 and 8 times EBITDA, or between 11 and 14 times net income after taxes. These are moderate multiples, considering the limited scalability and growth potential of human-based services, where capacity is always a limiting factor. Sales multiples usually range from 1.3 to 2.2 times revenue, depending on profitability. Professional services companies are usually quite profitable; typical profit margins range from 15 to 30% of revenues (EBITDA).

Despite this profitability, it is important to understand how to accurately assess the value of such a company. Valuation techniques are used to determine the worth of a consulting business. Although it can be difficult to apply these methods, it is possible to establish an acceptable range. The first step is to determine the discretionary earnings of the business owner. This can be done by calculating their salary, benefits, and earnings. You can also determine the value of a consulting business through an industry-comparable valuation and accounting valuation.

If a consulting firm has minimal assets, then their value is the multiple of its real profits. After analyzing and calculating what your consulting business is worth, you must ensure that all interested parties strive to be more productive in order to maintain its value. There are many small consulting firms in the United States, as well as large companies that are attractive to young consulting students. To calculate an exact number is difficult, but it is safe to assume that there are many such businesses. If you own a consulting business, you can hire professionals who can determine its value and worth. The industry consensus seems to be between 0.75 and 1.25 for a multiple of profits in a smaller consulting firm.

California, Florida and Texas are the three most populous states in the US and are great places to negotiate the sale of a consulting business.