the
fundamental
components
of value
Dom Moorhouse
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DOM MOORHOUSE
Guide 02
the fundamental
components of value
Foreword
This book tells the remarkable story of the founding, growth and ultimate sale
of Moorhouse Consulting, a UK-based professional services firm. That this was
achieved within five years is testament to the vision and drive of the author,
Dom Moorhouse. Zero to 10m in sales and 20m in value in five years is the
stuff of dreams for most entrepreneurs in the professional services world but
in this book you will not only find the blueprint but also the detailed how to
instructions to mimic this success.
My name is Paul Collins and I first met Dom in late 2005, almost two years
into the Moorhouse story. I was presenting a seminar for my firm Equiteq called
Proven Strategies to Build and Sell your Consulting firm. This two-day event
was based on my own personal experiences and the material obviously resonated
with Dom. After the seminar we talked about Doms ambitions to build a 20m
value firm within five years of founding; remember, he was two years in at this
stage. Whilst I could not quote many examples of firms who had achieved such
a feat (it took me 15 years of growth to achieve a sale of my own consulting firm)
Dom was resolute and he impressed me with his infectious drive and ambition.
Within a few months I was signed up as a Non-Executive Director and two
and a half years later, in August 2008 (six months earlier than planned), Dom
realised his dream and sold Moorhouse to BT, a UK Telecoms plc and a client
of Moorhouse at the time.
Moorhouse were the perfect client for Equiteq. They devoured all the advice
we and others had to offer and executed with military precision probably
something to do with Doms first career in the Royal Marines! They seemed to
get everything right and still to this day they are the only client we have worked
with who consistently met their quarterly revenue and profit targets throughout
our partnership. It is not an exaggeration to say they became legendary in our
circles and are still now the most quoted firm on best practice from our client
portfolio. If your desire is to build and sell a professional services firm, or even
to understand how to generate sustainable growth in sales and profits, you could
do no better than to follow the Moorhouse example as described in meticulous
detail in this book.
When I was building my own firm, WCI Group, I yearned for a guide to
help show me the way to rapidly grow profits and value. For the first 10 years we
did what most firms do ... we grew by trial and error ... lots of error! We made
every mistake in the book. In 1995, we tried to get external advice and spent
six months searching for books, mentors and advice from academics, the City
and the business world. Nothing seemed to fit our situation so we created our
own plan based on what we called our Eight Levers of Equity Value. That plan
accelerated our growth by a factor of 15 over the next five years and enabled the
sale of WCI in 2002. In this book you will read about the Moorhouse Multiple
Enhancement or ME programme which was their version of the same idea.
Every firm needs an ME programme. It works and in this book you will learn
how to create your own.
This book is the guide I wished Id had in the first 10 years of WCI. Every
page would have stopped us from making expensive and time-consuming errors.
It is written at a level of detail and with links to further resources like video clips,
tips and templates to make it an indispensable how to guide to grow your firm.
Whether you are just thinking about going it alone or your current growth has
stalled or you want to know what to do beyond just growing profits in order to
build future equity value, this book has everything you will need to keep you on
the right path to a saleable business.
If I am honest, this is also the book I wish I had written myself and I suppose
there can be no better personal recommendation than that! Dom has written
this book in the same way that he built Moorhouse with meticulous planning,
a talented team of contributors and advisers, disciplined execution to aggressive
timescales and with great humility and leadership style. Characteristics that you
will all need to build your Moorhouse story and probably the reason why my
book started but was never finished!
Enjoy reading it; I wish you good luck with your own entrepreneurial dreams.
Paul Collins, Managing Partner, Equiteq LLP (www.equiteq.com)
August 2012
Preface
You have in your hands now, one of the guides from The Five-Year Entrepreneur
series. If you are the owner of a professional services business or are contemplating becoming so in the future and you want to maximise the chances of
growing such a business to create personal wealth, then this guide is for you.
The Five-Year Entrepreneur series represents the information I wished Id had
ten years ago when my entrepreneurial ambition first started to stir and the
foundations for my own professional services venture (and personal adventure)
were formed. It is the reference I would have loved to have read and dipped
repeatedly back into during the critical years of building my own companys
value. Finally, it is the pragmatic checklist I sought when I entered the most
foreign, and demanding, of experiences the sale process.
I know all this because I had the most incredible of entrepreneurial journeys
progressing from start-up to a multi-million value realisation moment in
less than five years. As always, such a tale of business success is graced with good
fortune and I certainly had the wind on my back at a couple of critical moments (you will get to read more on this part of the story as the series unfolds).
More significantly, however, I was fortunate to have a great team around me
colleagues and external advisors to traverse this path with real focus, structure,
research and discipline. It is these gathered insights, experiences, anecdotes and
practical steps that I want to pass on, plus some signage to the inevitable holes
in the ground we occasionally stumbled into.
I recognise fully having been there just quite how time-poor you probably are. As such, I have broken the series down into individual subject guides,
and each guide is made up of elements that can be digested in part you just
need to pick and choose what works best for you. I know that the technical description can be a bit dry at times so I have also worked hard to mix this up with
the more human story such that you derive the benefit of knowing how such
aspects actually work (or not) in practice. This specially tailored series organisation, and formatting, is all described further within this Introduction.
Why read on?
Well, with the approach that this book series details, coupled with some hard
graft (this is not a get rich easy scheme!), you will significantly, and positively,
alter the forward path of your business in terms of its growth rate and inherent
value. This, in turn, will shorten the time it takes to get you to a point when
such value is of real-world, material significance. A point in time when you can
potentially trade such ownership for a life-changing, freedom-bearing financial
reward.
I have designed the structure of this book series to be a useful companion
to you on your journey. At a high level, it follows the phases you will embark
on understanding (what the journey will entail, where value lies etc), planning,
building (the guts of the series) and selling. Each of the detailed guides will sit
within one of these phases and, whilst there is a logic to consuming the information in this order, it is all perfectly accessible to the reader who just wishes to dip
in to gain insight in a specific area only.
This brings me onto the overall design. You may have found this sample on
my website (www.dommoorhouse.com) or an e-book store? If you return to my
website, you will see that you can get access to all the currently published guides
in the series. If your interest takes you further and you seek to derive further
value from this structured learning then please note also that each guide has
been specifically configured to work in reference with a number of supporting
resources (tools, templates, interviews, links, discussion boards etc) organised
on the same subject basis. Details on how to subscribe to these additional assets
are to be found on the website.
Finally, a heartfelt wish; however you seek to digest these guides and wherever you are in the entrepreneurial process good luck. You have my utmost
respect and the world certainly needs more people like you. I just hope that this
book coupled with your spark, vision and industry contributes in a small
way to the decisions you take and the success you deserve.
Dom Moorhouse
Bath, 2012
if they are, indeed, enjoying a regular profitable income (putting aside the obvious concern that it is, in practice, very difficult to stand still and not actually go
backwards). It is a perfectly acceptable career, or work-life, choice and certainly
I do not seek to be self-righteous about the deliberate alternative. Its just that
this series really talks to those who have, or plan to have, an explicit ambition to
grow their business.
This does not mean, however, that you will only get value from this book
series if you intend to make a cast-iron commitment to, or goal of, the act of
selling your business; although if your plans are explicit and time-bound in this
regard, it is most certainly for you! As a minimum, I just anticipate that you
want to, through a disciplined plan-to-build approach, position strategic options for such a potential eventuality in the future.
Behind such an intent lies a myriad of personal drivers and goals. This should
include the professional satisfaction and personal growth journey involved in
leading a successful firm. There are few satisfactions greater than knowing that
your entrepreneurism, vision, drive, industry and force-multiplying enthusiasm
is responsible for a small economy on which other livelihoods (and their dependants) prosper also. For certain, such people are needed in abundance to
rescue modern economies from their recent malaise! There will also be a driver,
invariably, for self-determination be that in the form of a greater influence over
your own career path and/or a desire for greater wealth on which such future
flexibility can be based. There is nothing to be ashamed of in such an admission conversely, candour with yourself and key others is important here. It is
perfectly possible to reconcile such personal ambition with sustainable, ethical
business development and that is the sweet spot on which this set of books is
going to linger.
In summary, this book (as part of the overall The Five-Year Entrepreneur series) is for anyone who is, or who aims to become, an owner of a professional
services business and has a targeted intent to grow such a business in order to
potentially at least derive a personal wealth-creation point in the future.
Part 1:
Understanding
Guide
Guide
Part 2:
Planning
Guide
Guide
Business Planning
Business Organisation
Part 3:
Building
Business Development
Guide
Guide
Guide
Guide
People/Talent Management
Guide
Guide
Guide
Guide
Operations
Guide
Guide
Guide
Guide
Financial Control
Service Delivery and Quality Management Systems
IM/IS Capability
Estate/Office Management
Part 4: Selling
Guide
Guide
Guide
Readers Note
The respective guides are being published as they are completed. As such, you
may have your hands on one of the early, foundation books with the remainder
of the series still to be written. Indeed, if this is the case, you can head to the
website (www.dommoorhouse.com) and influence the chronology in which the
remaining guides are produced.
Guide Elements
This book is designed for the time-poor. Whilst you will get most from it by
reading cover to cover (and any such investment in time to do so will be well
rewarded), it can also be dipped into as per your business challenge of the moment. However you approach it, each guide will have a consistent set of information blocks to further assist the rushed reader so you should look out for the
icons of each:
Aims:
Objectives you should achieve in reading this guide.
Top Tips:
Simple, practical guidance from the coalface.
Links to Resources/Tools:
References to relevant assets contained on the books website or links to
external resources.
Activity:
Signposts an activity you are recommended to undertake to cement your
knowledge or improve your business. These activities will be collated into the
guide checklist for summary reference.
Checklists:
A simple tick box list for those key things to do now.
Motivation Moment:
Quotes and anecdotes that teach or inspire.
Cautions:
Things to watch out for, traps to avoid.
Case Study Corner:
A relevant aspect of the Moorhouse story to illustrate a point.
As a minimum:
Final section giving you the least you need to know.
UNDERSTANDING
All men dream: but not equally. Those who dream by night in
the dusty recesses of their minds wake in the day to find that it
was vanity: but the dreamers of the day are dangerous men, for
they may act their dream with open eyes, to make it possible.
T. E. Lawrence, The Seven Pillars of Wisdom
GUIDE 02
The Fundamental
Components of Value
AIMS
CAUTION
This guide dwells on the topic of value specifically as it refers to the
financial price a buyer would be willing to lay out for your company in
the future. Helping you to understand this is an extremely important
step in the context of a book that seeks to guide its readers to a stage
when such value has a real, potentially life-impacting, quality. That
said, I am conscious that what I am about to describe can come across
as somewhat sterile, financial or just a bit too self-obsessive about
internal matters. Little mention is made of the work you do, or the
clients you serve.
For the complete absence of doubt, therefore, let me make one
point abundantly clear before we set off. All this talk of your own value
is for nought if you are not primarily obsessed with, and successful in,
delivering tremendous value to your clients in whatever services you
offer as gauged by them. In order to even get started on this topic, I
have to assume that this is your foundation. With that important point
made, lets get going
Figure 2.1: Illustrative EBITDA multiples a financier would be willing to pay based on a three-year payback period
(against a range of projected annual EBITDA growth rates)
CAUTION
If the previous section touched on what value is in the context of a
professional services firm, it is really important conversely to be
aware of what it isnt.
The value of your business has nothing to do with how long you
have been trading per se; only how long you have been trading in
profitable growth. It also has nothing to do with the potential egotrappings of running a business; for example, how many people you
employ or how large and shiny your office is.
Finally, it has nothing to do with how hard you are working or
have worked historically. If only there was always a direct correlation
between hard work and value generation, the world might seem a
fairer place. The truth is, however, that the vast majority of business
owners are working hard; it is just that this needs to be coupled
with smart stratagems and decisions that actually impact the value
equation just described, for this effort to be relevant.
CAUTION
Another aspect you should really guard against is a revenue growth
line full of peaks and troughs. Potential buyers will be very wary of
this as it tends to point to a company with a small portfolio of clients
(and the vagaries of their on/off purchasing decisions).
A Value Map
There are many ways of coming at the question of where value lies in a professional services business. What I have just covered is the classic valuation formula.
This book is fixated on how to build value in your business, so I am also going
to spend time discussing management focal points, strategies and the practical
steps that support you in this regard. The crossover between valuation techniques, generic business-enhancing strategies and specific professional service
focal points can be confusing; as such, the following schematic (a Value Map)
serves to illustrate their interconnections.
My areas of focus are the top and bottom layers of this map. The middle layer
describes the high-level generic strategies open to any business. On this layer,
A and B should be obvious. Point C talks to the efficiency by which you move
working capital around your business (the oil in the system). The more efficiently you chase down client invoices, for example, the less exposed you are to
requiring bank loan (with interest payment implications) to cover any periods
of indebtedness to your own creditors. Hence this aspect impacts your multiple
(your cash handling will be a key point of market scrutiny). Whilst points A-C
can be gleaned directly from your financial statements, point D is the more subjective aspect of your capability/culture/brand/ethics as externally-assessed.
By showing this all together, I hope you get a sense of the interconnectedness
of the topics covered. I also wanted to demonstrate, before we get going, that my
practical focus on the bottom layer of this Value Map represents a comprehensive approach to the task of lifting overall value.
Profitability Explained
It should be clear to you, if indeed it needed reinforcement, that profitability
(and profit growth thereafter) needs to become your fixation if you are ever to
build a company with value.
As the old maxim goes:
Revenue is Vanity, Profit is Sanity, Cash is Reality.
In order, therefore, to protect your sanity and your future wealth potential
we dwell now on how profit is derived and measured in a typical professional
services firm. As an aside, the cash management point is also rightly emphasised
in this maxim and we will look at this in detail in Guide .
Lets look first at the classic DuPont Formula as it is used to calculate Return
on Equity (ROE) in a typical, industrial company:
Guide will cover the central discipline of capturing, and analysing, regular management information (MI) in your business in order that effective actions and
decisions are being made with tempo. You will not be surprised now to know that
this Profit per Owner formula rendition needs to sit at the heart of this reporting
format with sub-levels that mine down into each of the three critical aspects
margin, productivity and leverage.
It is also worth saying now that in managing profitability, you must focus on
each of these elements it is a mistake to omit any one of them from your continuous analysis. For example, if your reporting system focuses on productivity at
the exclusion of leverage, you may erroneously reward an owner who is driving
high personal utilisation and fee rates as compared to a fellow owner, with low
productivity, who is highly leveraged. Yet, the latter (who is managing more junior
staff colleagues effectively) is likely to be putting more profit into the business.
With experience, and a certain degree of experimentation, you need to get to
the optimal profitability blend recognising en route that you always have these
three levers to pull.
ACTIVITY
If your business is up and running, ask yourself how well your current
reporting system provides useful MI on your profitability; specifically,
does the report lead the reader to a balanced view of the three
sources of profit? If it doesnt, then take action to re-design the
format and/or update the way feed information is collated.
LINKS TO RESOURCES/TOOLS
A real guru in the areas I am covering here is David Maister (www.
davidmaister.com). His book Managing the Professional Service
Firm is an enduring classic and I strongly recommend it to your
professional bookshelf.
Put another way, it is the average revenue earned per fee-earning staff member.
ACTIVITY
This productivity figure is a key one that you will need to have a
really good handle on. Ask yourself, do you know what the industry
average is for your sector? Do you know what your competitors
achieve? What do you think distinguishes those with high revenueper-staff from those with low levels? If you dont know the answer to
some of these questions, start researching into it such that you can
set realistic stretch goals for your business productivity.
Taking each part of the productivity formula there is, again, a need to separate
out tactical (short-term) improvement approaches from strategic (long-term,
sustainable) ones. In the former category, sits all efforts to increase utilisation.
This has its place and you are right to be fixated about achieving a certain target
level but be very wary about an overbearing focus once this is achieved. A strategy that seeks to improve utilisation year-on-year is doomed to fail as once
you pass optimal healthy levels, a greater volume of billed days/hours per staff
equates to disenfranchised people, poor morale, low levels of innovation and,
inevitably, an irresponsive business development capability. All of which spells
disaster for longer term value creation.
Rather, the savvy approach is to focus on value or the rates you are able to
charge. This is, clearly, more than just a case of raising your rate card. In order
that your clients can accept this, you need to develop the underlying fundamentals that they value; for example, providing them with first-rate skilled staff,
relevant technical specialisation, thought leadership and supporting resources/
tools/software etc. Moving up the value chain in this regard is central to growing your firms profitability in a sustainable way.
Finally, leverage. This, like the value derived from your average fee rates, is
a strategic issue for your business. Once you have managed overhead costs and
utilisation to healthy levels, it is only by improving your fee structure or your
leverage that the economics of your business will improve commensurately.
This is such a fundamental area, that Guide on Business Planning is going to
cover it in some detail. Suffice to say for now that leverage is the ratio of your
equity-bearing owners (maybe just you for now?) to the non-equity-bearing, feeearning staff. As a further detail, leverage concerns itself with the shape of the
ACTIVITY
Guide 03 will cover this analysis in detail but, for now, make a note
of what the average engagement team size, and experience/grade
structure, is likely to be for the types of services you will offer. This
will be an invaluable feed into the more detailed business planning
you need to undertake.
TOP TIPS
Measuring Utilisation
It should be becoming clear by now that setting, and then
managing towards, the right utilisation target(s) for your business
is a key management issue. The topic can be obfuscated with
multiple definitions and treatments; as such, you should aim for
two principles when you discuss utilisation within your business
simplicity and consistency.
By simplicity, I mean that you deliberately limit both the language
set used in this regard and the number of time, or service, codes
you track. By example, some companies refer to utilisation to refer
to all time spent working on useful projects (client and internal). In
such a semantic treatment, it covers all work time with the exception
of being on the beach (or the equivalent phrase on the bench)
when a staff member is essentially awaiting tasking. In this treatment,
I would personally steer you towards the latter treatment. If you want
to develop a sustainable business then you should be deliberately
factoring in an expectation that a certain amount of time each year is
invested in the development of you and your staff (training, internal
communication events etc). You should also expect your staff to
take their full holiday allowance any alpha-male company that
rewards those who dont will ultimately pay for this perverse, myopic
tactic with increased staff attrition and low levels of innovation and
actual effective productivity. If you agree with these statements,
then this version signals this clearly to your colleagues. Further, it
also makes sense for your 100% target to focus on what is actually
set aside for billable time compared with constantly asking yourself
what percentage of your theoretical denominator is the maximum
practically possible.
By way of example, say there are 260 working days in the year
(noting this changes with the fall of weekends and whether a leap
year) and 8 public holidays and that your company offers 25 days per
year holiday allowance and expects everyone to undertake 10 days
training. This leaves an Available Time denominator (post holidays
and training) of 217 days (or 1,736 hours).
Regardless of your choice be consistent. It is futile having
management conversations around utilisation when multiple
treatments are being used. Agree on one, communicate it loudly
and stick to it.
CAUTION
By way of a mild caution, I may have given you an impression thus far
that all these management levers and profit improvement tactics are
very mechanistic and distinct. The reality, of course, is that there is
a huge amount of interconnectivity. You pull and improve one lever
over here and another aspect may worsen. As you come to reinforce
your understanding of the points raised in this guide and practice
your ongoing management control of them so you will get a better
feel for these linkages.
It is also worth saying at this point that one of the hardest
management items in this set is leverage. It requires real ongoing
proactivity to arrive at and maintain a target structure. Your hiring
strategy needs to be acutely aware of this target structure; as does
your promotion activity. If you dont constantly track it through such
HR cycles, you will very quickly get out of shape.
The Multiple
Enhancers
So, having covered the
importance of profit
as a core component
of value, lets turn
now to the Multiple
component of the
typical valuation formula.
As I mentioned at
the start of the guide,
once profitability is under control this should
be the key aspect of value
on which you turn your
managerial focus. Of course,
the vagaries of the macro
economy, and/or the specific
idiosyncratic circumstances of any
buyer, do have an influence here
but nowhere near to the extent you
have. A sound company, led by an owner
who understands this fundamental point, will
always achieve multiples at the top end of the
trading range, even in a bear market.
The main point being the most important of this guide
that you can, through deliberate decision, investment and activ-
Multiple Enhancers
Management
Information and
Decision Making
Service
Propositions
and Thought
Leadership
Marketing
7
Selling
A Values-based
Culture and a
High-performing
Team
Weighting
Multiple Enhancers
10
Knowledge
Management
and Intellectual
Property
11
Talent
Management
Recruitment to
Exit
12
Continuous
Professional
Development
13
Weighting
Multiple Enhancers
14
The Leadership
Team
15
Financial Control
16
Service Delivery
and Quality
Management
Systems
Weighting
Multiple Enhancers
17
IM/IS Capability
18
Estate/Office
Management
Weighting
Figure 2.9 The Moorhouse ME Wheel (showing ME Team leads and team members)
growth journey and to develop their own knowledge and skills across such business domain areas. The culture at Moorhouse was very much this is your firm, so
help us build it and, indeed, the presence of this organising logic soon became
a real recruitment feature for the aspirant new joiner who was motivated by this
dimension of life in the company.
After a couple of years of running ten ME project teams, a large amount of
ground had been covered and some capability aspects that were initially project
outcomes were moving into everyday, operational concerns. For example, once
the Marketing ME Team had successfully recruited a permanent, professional
marketeer and supported her in the process of establishing key marketing processes, its job was partly done. That is, they could ease back from the process of
establishing and running the basic operation (now in the hands of a professional) and focus on supporting her in the ongoing development of the capability.
Organisationally, therefore, ten teams eventually became too many, too overengineered, once these foundations were built. Nonetheless, the principle of
whole-firm involvement in all such key areas of the business remained critical
so we simply reduced the ten teams down to four, consolidating Quadrant teams
(as per the Multiple Enhancers Diagram in Figure .). This construct survived
for the duration of the time it took to take the business to sale and beyond.
TOP TIPS
You will have noticed, however, from the previous section, that the Moorhouse
ME Wheel does not map directly to Equiteqs levers (as sound as they are); nor
does the guide structure of this series map directly to the ME Team organisation that we settled on at Moorhouse in those early days.
In this series after further experience and consideration on the matter I
have opted for the more granular approach in order to ensure all key aspects are
given due attention. As tempting as it is to consolidate, I would be doing you
a disservice in the process as the devil really is in the detail when it comes to
actually building these capabilities within your firm.
That all said, I strongly suggest that you start thinking now about how you
might go about organising your colleagues along such lines as/when you get to
a scale that such a delineation of responsibilities is relevant. Clearly, you dont
want the complication of managing fourteen such teams but, in the early years,
eight to ten such teams is about right (as there is so much ground to cover).
The important point is that as long as you cover all the multiple enhancing
elements I will present to you in this book you can organise teams to address
such matters by your own thematic bundling. Better still, organise a team session at the appropriate time to discuss this and the optimal carve up within
your organisation. The resultant project team structure is far more likely to be
owned, and accepted, by your colleagues if it is self-shaped.
Figure 2.11 - Historical multiples for professional services firms sold in N. America (20072011)
As I mentioned previously in the guide, as private companies are generally owner-managed, reported profits tend to be restrained by various expenses that may
be non-recurring under a new owner. This will have been factored into the price
the purchaser paid, but may not be reflected in the profits declared to the public.
The effect of this is that the multiple paid as calculated from the publicly available information is invariably overstated. I recommend, therefore, that you
pay more attention to the second data series in the graph (that I have discounted
back by a sound working assumption as to the difference) for a more
realistic sense of the multiple range you can achieve.
ation is unlikely to give you a full negotiating hand. Indeed, the old acquisition
maxim one buyer is no buyer is a really important one to acknowledge, early
on, in your quest for optimal value.
To get the maximum value and the best terms, rather, you are far better off
entering into a deliberate, well-orchestrated competitive situation (supported by
the right professional advisers). The question, therefore, is at what stage is
such an exercise likely to be tenable?
As a guide, I would say the following. A competitive sale exercise is achievable (and affordable) when you have met the following outcomes:
t grown revenues to at least m (m) per annum;
t consistently (previous three years) delivered an EBITDA of plus;
t consistently grown EBITDA, year-on-year, by at least ;
t a rounded portfolio of clients (cf. being a one-client success story);
t a demonstrably accurate sales forecasting capability (premium values go
to those firms with a strong order book e.g. over of business already
booked for forward six months);
t a stable and committed leadership team.
Of course, there are exceptions, but this simple set of targets serves to illustrate
an entry threshold that you should aim to head towards and beyond.
Who is buying?
You may be surprised by the number of different classes of buyer. All I would say
at this stage is keep an open mind. As my case study will reveal I certainly did
not pre-envisage, or indeed seek, the buyer type that Moorhouse attracted (albeit
an excellent mutual arrangement was built). But more of that later.
For now, it is just worth a quick canter through the types of buyers out there
and we will then return to this in more detail in Part (guidess to ).
Trade Buyer
This will typically be a strategic acquisition by another professional services firm
or, indeed, a firm seeking to supplement its existing product-based offering with
a new professional services capability. Regardless, such a firm will clearly be seeking to bolster its own growth ambitions by using your company to do at least
one of the following extend its geographic, service or client reach or, simply,
just to grow its capacity.
Investment House
This is primarily the domain of Private Equity (PE) houses albeit some Venture
Capital (VC) houses have also been known, on rarer occasion, to invest in PS
firms. Such deals are fairly clinical, financially motivated decisions with the Investment House looking to make a good future return for its own fund investors
based on your historical trading results.
syncratic/rare this matching is, the higher a synergy premium you can command. If the combination really works for the buyer, if it really talks to a strategic growth ambition they have, then the synergy value can be so high as to dwarf
all the other sources of premium value I have mentioned.
At first flush, it may appear that you have minimum control over these latter
two aspects but this is not so. Getting the right market premium is about having
a dynamic, strategic timetable and constantly monitoring the macro/economic
conditions to select your future, sweet spot moment. Similarly, you can improve the chances of a premium buyer-synergy sale by undertaking a thorough
buyer search-and-tell exercise at the start of any competitive sale process. We
will cover this in Guide .
Finally, a key factor you should also consider now is what you intend to do
at such a future point. If you are still very much a driving force behind the company at a point of sale, you will not be able to just walk off into the sunset. To
do so, would have serious implications for the valuation; indeed, it would likely
negate any chance of finding an interested buyer. The usual situation is, rather,
that key leadership members will be locked-in for a (typically one-to-three year)
period (through the incentive of an earn-out arrangement). The only way you,
as an active owner now, can plan for departure-on-exit without any erosion of
value is to essentially design yourself out of all the management processes in the
interim. For any buyer to believe your complete departure will not denude value
they will need to be sure you have had minimal influence on the immediately
previous trading history, or company operation. That is, you have effectively
already retired to shareholder-only status some time prior to the sale. Whilst
such an effective pre-sale extraction certainly makes the growth journey even
more challenging, it is not impossible; but, clearly, if that is your ambition, it
will require very, very careful management.
ACTIVITY
Take some time out to assess the landscape of future, potential
buyers. Look for firms that might have a strategic requirement for the
types of capabilities you are building; that is, where there is future
potential for a buyer-synergy premium. Ask yourself what more you
can do to enrich such a capability-matching yet further. This analysis
will feed in perfectly to the business planning activity we are going
to cover in the next guide.
TOP TIPS
Tax Planning
This guide has focused on company value; in doing so it lays the
foundation for the rest of the book. In that this is all eventually about
rewarding you, I need to draw your attention to a factor that will
have a significant influence on the personal wealth you, ultimately,
create for yourself and others. Tax Planning. I am no expert in this
field but I do know, with some experiential reinforcement, that you
are well advised to court the expertise of tax experts from an early
stage; for example, as soon as you establish share, or share option,
schemes. Without such advice wired into your overall value-creation
plans, you will, undoubtedly, personally lose more of this value
extraction than you need to. Start searching around for well-referred
tax advisers now.
cheque; rather, they will be looking for real delivery team cohesion, collaboration and a collective loyalty to the firm and its clients. It is, further to this, impossible to build all the other multiple-enhancing capabilities I describe without
such a team ethic in situ in the first place. Getting this buy-in, this extraordinary
psychological contract from your colleagues, only comes about if you build a
values-based culture from the off. I will leave this point there for now; it deserves
necessary expansion in its own guide (Guide ); suffice to say, in final analysis,
the real path to building value starts with having values.
CHECKLIST
F
LINKS TO RESOURCES/TOOLS
Check out the guide 02 Resource Folder on
www.dommoorhouse.com for more resources including an interview
with Paul Collins on the value growth process
AS A MINIMUM
U Understand that a professional service firms valuation is driven
by the buyers expectation of future profit.
U The most common valuation formula is a multiple of profit where
the multiple is based on an assessment of the capabilities within
your business.
U You will increase the value of your business by growing your
profit and building the set of capabilities that can sustain such
growth into the future.
U There are many capability elements to work on but the most
important are an accurate revenue and profit forecasting
capability, differentiated service propositions, your marketing
and selling engine and a high-performing delivery team (which
only exists when the leadership team is exemplar also).
U Profitability is a function of margin x productivity x leverage. You
must measure and manage all three of these profit levers.
U This series of guides is structured on the basis of the multipleenhancing elements. You should give early consideration as to
how to organise project teams (tasked with building capability)
around these themes.
U One buyer is no buyer. You will only ever derive maximum value
from a competitive bidding process. Such an exercise is viable
when you have $8m/5m-plus revenues, demonstrable profit
growth and an accurate sales (and profit) forecasting capability.
U There are four classes of buyer of professional services firms
your own management, trade buyer, stock market flotation and
Investment Houses.
ENDNOTES
1
The name comes from the DuPont Corporation that started using this formula in the 1920s
Acknowledgements
Writing a book like building a business is a team sport. In the same way that
I used to feel awkward taking solitary, personal plaudit for Moorhouses successes (recognising, always, how many people had contributed to this), so I feel that
the singular descriptive of author belies the massed efforts of contributors, advisers, reviewers, family and friends who truly keep such a project on its tracks.
To this end, as a newcomer author (and publisher), I am particularly grateful
to the support of my editor, Lynda Watson, and typesetter, James Nunn. They
introduced a complete novice to the nuanced craft of writing a book and showed
commendable patience and professionalism as I blundered my way through the
early stages of this process. In a similar vein, thanks go to Jonny Perl, and his
team at Traffic Digital, for the illustrations that help bring this series to life.
I set off on this book series aiming to produce content that was genuinely
relevant and useful to professional service firm entrepreneurs cf. being a complete vanity project (there may still be shades of the latter). If I have got even
close to achieving this aim, then the many expert contributors and reviewers
deserve fulsome plaudit also. Thus far (in the part complete series), this illustrious group includes: James Appleby (Bluefin Solutions), Pete Austin (Suiko), Paul
Collins (Equiteq), Jon Everett, Nick Fletcher (Vivendi Consulting), Bob Hendicott, Tanya Lightbody (Ingenuity Inspired), Andy Marsh (Suiko), Martin Powell
(Cambridge Market Research), Tim Phillips, Jon Russell (Moorhouse), Lars Tewes (SBR Consulting), Rupert Tobin (100%Cotton) and Paul Wilson (Provelio).
There would not have been any content or story to tell in the first place,
however, had it not been for the simply awesome team that was the firm Moorhouse during my tenure of MD-ship from 2004 to 2011. Leadership is an absolute privilege and pleasure when you discharge it amidst such a talented
group of colleagues. For any pearls of motivation or knowledge I was able to dispense, I received ten-times back in return from all of those I worked with. There
are too many to name in person here but they all know who they are; collectively,
they are the founders of what will, hopefully, be a great firm for many years to
come. To all of them, a heartfelt thank you for supporting me in building such a
tremendous business and for having such immense companionship and humour
en route. It is a very special thing indeed when your primary reflex, on reflection
of a period in your life, is simply to smile.
Finally, a long overdue thank you to my wife and children. Building a team,
a business or a book can too easily result in a single-tracked restriction of ones
overall vision. I have certainly been guilty of such mildly obsessive pursuits. As
such, Roz, Finlay, Claudia and Annika deserve all concluding credit for their
loving tolerance of an imperfect husband, and father, and for their daily demonstration to me of what is truly valuable in life.
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the guide i wish id had to building and selling a professional service business.