How Large Does a Professional Services Firm Need to Be in Order to Sell?

The concern in the purchase of a consulting firm is always one of, “is all the spark from one excellent owner” or is there really a business system there that the next owner (or investment group etc.) can run. In general larger will be worth more (presumably both a higher multiplier and a larger profit).

My belief, one man's opinion, is that if you have about 10 competent people who can procure and/or do the work (partner caliber) depending on your model then you are starting to prove it is a business model and not just an exceptional owner. You also start having some security from the law of averages that if a few of the key people leave you are not losing the whole business.

A sample model might be a strategy consulting firm where the owner believes that each partner level person can sell $300,000 to $400,000 per year. I would put his bottom size at $3-4M assuming he has ways to keep the people together for at least 2 years after the sale. Employee or contractor non-competes and stay agreements will be very important to the purchaser. In order to obtain these restrictions you generally provide bonuses for staying through the transition.

Another issue is how hard is your service to sell vs. how sticky is your service. This is a function of your industry, your model and frankly your track record with customers. Sticky services and long term relationships are always good. For instance accounting firms where the clients need the same service every year tend to be sticky. One man accounting firms can be sold readily.

If your service is a difficult sale but you get a big profitable sticky tail it has value. This is probably closer to the true situation for a strategy consulting firm. If the service is a difficult sale for few $$'s it will be difficult to build and difficult to sell.

In general the easier the sale and the stickier the service the smaller the business can be.

To recap the primary issue in professional service business sales is proving that there is a business system that will continue to generate profitable cash flow after the sale and settlement. If you can demonstrate that you will be able to sell your professional consulting business whether it is very small or quite large.

What Every Business Owner Needs to Know About Selling a Business

A few pointers business owners should know about selling a business.

• Report all income to the IRS and keep clear books and records. It is the right thing to do. If that is not enough motivation for you I have a broker friend who is old school. He and his seller pulled out the 2nd set of books – the “unreported cash” books. Unfortunately, it turned out that the “buyer” was an IRS agent.

• Do not “hide”, “ignore”, or “overlook” serious business problems. This is an invitation to a lawsuit. Every business has a few problems. Either fix your problems or provide reasonable notice of them. Different buyers will see different things as risky. For instance I was involved in the sale of a machine shop where one client accounted for 80% of total revenues. In order to overcome the problem we talked to the customer who was willing to meet with the buyer and confirm that so long as product quality and delivery commitments were met the relationship would continue.

• Have the sales contract prepared by a competent transactional attorney. Many unexpected things can go wrong after a business changes hands and a proper contract will provide protection for most of them. For instance I was involved in a sale of an engineering firm and the seller agreed to warranty obligations to the extent of and for the period that they were covered by his professional liability tail insurance. This provided reasonable protection for the buyer and seller without leaving the seller open to endless potential liability.

Selling a business is complex. Work with people who can help you get the job done right.