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.

Two Laborers - A Short Story

A story:

Many years ago two hard working guys took jobs as laborers digging ditches. The first laborer worked hard 10 hours a day but never lifted his head up and looked around. 40 years later he was still a laborer.

Whereas the other guy also worked 10 hours a day but after a year or two he asked for and received training to learn how to lay brick. After working as a mason for 5 years he figured out how to oversee other men for the owner and became a foreman. Finally, he took a big chance and started his own masonry company.

Did he really work harder than his associate who 40 years later was still digging ditches 10 hours a day?


Now more than ever you need to both work hard and work smart. Make sure you have a way to grind out the work but also be keeping your head up, looking for opportunities. They are out there waiting for you (or your competitor).

Build a Sales and Marketing Process

Sales and marketing is the most important system in at least 90% of the businesses we look at. It is also one of the biggest weaknesses in many companies. Many businesses are started by tradesmen and technical experts who are determined to deliver a better service or product. Yet, there business suffers because they do not learn how to build a pipeline of clients.

Many industries like construction subcontracting and engineering are very dependent upon relationships. An owner with a few good relationships can build a fairly large volume business. This is great until it is time to sell. Then prospective buyers will view the high risk of loosing major clients negatively. This reduces the value of the business.

The solution to these two problems is the same. Build a professional sales and marketing system independent of the owner.

For instance, build a system based on networking by staff, advertising, word of mouth, direct mail, location, or other technique that generates leads. The leads are given to trained salespeople who know how to close a reasonable percentage of the prospects. These systems are tracked and fine tuned to improve performance. Auto dealerships, software companies, distributors, and many other businesses use these techniques to improve their business and increase the transferability of the business.

A sales system that is independent of the owner and proven over time increases the likely survival of the firm. If there is any way possible in your industry to build an independent system do so. This will increase your business value.

Five Things Every Specialty Trade Contractor Should do to Increase the Sales Value of Their Business

Five suggestions that will increase the value of specialty trade contractors like plumbers, electricians, HVAC, etc. Generally these are items that need to be worked on every day, over long periods of time in order to garner the greatest benefit.

1. Increase service work. Service work that will be performed over a period of time provides proof that customers exist and cash flow will continue. Service work is more likely to continue versus new construction when the economy takes a dive. The ability to prove that some work will continue even in slow times in order to pay debt, salaries, and overhead is essential.

2. Avoid the one or two large clients syndrome. No matter how much you love each other eventually that will change. Then where will your business be? Reduce risk by having many smaller clients.

3. Keep overhead low. In good times it is tempting to buy every gadget, toy, and big expensive piece of equipment available. The same goes for purchasing yards and real estate to house the business. This is fine - just stay tuned to where you are in the economic cycle – namely buy early or use short term rentals if possible. Always focus on the amount of debt, long term rent, and other long term cash drains that you have committed to. By keeping overhead low, especially overhead you cannot shed; you will be able to survive if revenues take a dive.

4. Develop a sales process that is not owner (you) oriented. This is often a bigger problem with most new construction contractors than companies that perform service work. Make sure you have a process to generate leads, perform estimates, and obtain work orders or contracts that is not solely dependent on you and your relationships. If it is all you, how will you ever convey it to someone else.

5. Hire great people and create enticing golden handcuffs or stay agreements for the top tier. Most businesses are only as good as their people. In fact when your people go home at night so does most of your business value. Finding and keeping great people will allow you to grow and maximize your value at the same time.

Follow these steps and create a valuable company that you can enjoy owning and others will want to buy when the time is right for you to move on.