Countless daily choices can influence the value of your architecture or engineering business in a future transaction. For a personal analogy, most people don’t obsessively check their home’s market value every day, but they likely make routine maintenance moves. This not only protects the home’s eventual resale value – it also makes it a nicer place to live while they own it. The same ownership mentality can yield positive results in the business world as well.
Even if you’re not planning a transaction any time soon, keeping an eye on key value drivers can protect your financial stake in the business and create a better work experience for your employees. Building these top buyer and seller considerations into your architecture or engineering firm’s financial reporting and forecasting will also ensure you’ll be ready when opportunity comes knocking.
5 Buyer-Side Considerations for Business Valuation
Buyers tend to look at hard data such as public records when they’re forming an opinion about the worth of a business. The upside of this approach is that they’re able to make objective evidence-based decisions about multiple valuation factors. The downside is that they may tend to disregard intangibles that could justify a higher asking price.
- Public information: This could reach beyond basic records that are available from government and paid services to include your company’s online reputation.
- Earnings history: Buyers will want to see at least three years of complete and orderly financial statements. The most common valuation approach is the income multiplier.
- Growth prospects: While sellers often emphasize past and present factors, buyers also focus heavily on the value a business (and an industry) can deliver in the future.
- Management depth: Often, buyers want a capable, diverse, and stable leadership team to come along with the business, rather than risking reliance on one or two founders.
- Employee stability: In addition to a solid leadership team, buyers are sensitive to the skill mix and engagement level of the people who make products or services possible.
The sooner you start actively managing these factors, the better. Have open conversations about them with your leadership team so that routine performance checkups include realistic metrics in each of these areas. The attention and adjustments you invest in now could yield a substantially higher valuation when a potential transaction opportunity is on the table.
5 Seller-Side Considerations for Business Valuation
Understandably, architecture and engineering firm owners sometimes have personal attachments to a business that influence their opinions about its worth. Working founders whose identity is closely linked to the company may need to delegate some hands-on operations to other leaders to focus on actions that benefit valuation. The best of both worlds is to continue investing in the strengths of your business while adding a buyer’s perspective to your management practices.
- Solid performance history: Consistent margins, controlled expenses, marketing wins and customer loyalty can create a climate that supports increased business value.
- Diverse customer base: Valuation can be at risk if your business relies heavily on one or two key accounts. Diversity can include size, location, contract type or market sector.
- High employee retention and engagement: Your customer-facing employees and front- line managers drive revenue and reputation. Attract and retain top talent.
- At least three years of comprehensive financial statements: High-value companies keep orderly records on revenue, expenses, cash flow, assets, liabilities and more.
- Investment in growth and competitive advantages: Forward thinking leaders invest judiciously in future capabilities, not just in immediate transactional needs.
As you build a plan to optimize and understand the worth of your architecture or engineering business, remember that not all businesses are the same. Many variables influence valuation, and they must be considered objectively for the context in which your company operates.
Ongoing awareness of the factors that drive business value will help you protect the health of your company today while laying the groundwork for an eventual transaction. Positioning your leadership team for success may include consulting with outside accounting experts, tax advisors, attorneys or bankers. The important thing is to ensure that your management view includes all relevant company, industry and market factors.
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Clayton & McKervey’s transaction services team provides trustworthy advice to architecture and engineering business owners. We’re also experts in succession planning, employee incentive programs and tax strategy. If you have a deal in the works, or if you want to prepare for one in the future, we would be delighted to have a conversation with you about your individual situation. Contact us today to learn more.