We explain our standard valuation approach for a knowledge-led business such as a management consulting company.
Management consulting firms are heavily dependent on their employees for their knowledge and skills. The business services industry in an important engine of growth for the UK economy and the consultancy sector grew by approximately 8% in 2019 (Source: MCA). PEM Corporate Finance has a strong track record of working with “knowledge-led” businesses such as consulting firms.
The standard valuation approach for a knowledge-led business would be the market-based approach. An appropriate multiple must be found to multiply against EBITDA – earnings before interest, tax, depreciation and amortisation – to arrive at the enterprise value or EV. It is effectively market value of the company plus surplus cash or minus net debt. It is difficult to find an exact figure when if valuing an unquoted company and so often a range is the most representative as different multiples are applied.
Comparable companies and comparable transactions from the relevant sector are analysed separately to find different multiples. Recent transactions give an idea of what potential buyers are willing to pay for a similar business. Comparable quoted companies can be used to see what a company in the sector would be valued at right now, in the current economic climate.
Financial information is not the only aspect of a valuation. Multiples also reflect the value of a business which may not be reflected in the EBITDA figure. This is important in the knowledge-led sector which has some crucial non-financial factors. The skills, intellectual property and client relationships particular to key staff are intangible features but instrumental in the business. Other factors include market position and customer concentration. A diversified client list also adds value to the company, and is particularly important if a consulting firm is preparing for a sale.
Multiples are likely to be higher in a growing sector such as digital services or artificial intelligence and especially if that growth is likely to be sustained. Generally, a company is valued more highly, and buyers will pay more, if there has been significant growth in the company or if this is forecast (within reason) for subsequent years. Methods of analysing growth can be via the number or value of new clients and projects as well as client retention rates year-on-year and recurring revenue levels.
Deal volume and value in Europe increased in 2019 for knowledge-led businesses such as management consulting firms. Although deal volume increased internationally, this growth was strongest in Europe. The average EBITDA multiple increased to 8.0x, and looking ahead, knowledge economy multiples across the globe are also generally on an upward trend (Source: The Knowledge Economy Global M&A Report 2019, Equiteq).
In 2020, deal volume significantly decreased in the first half of the year. However, the MarktoMarket survey found that professionals believe deal volume will gradually pick up. Once we move out of the UK coronavirus lockdown restrictions, we have seen the consulting sector is picking up again. Companies have either found alternative ways of working or clients are ‘pressing play’ again on projects.
Although there are usually some challenges in valuing a knowledge-led business, we also now must consider the impact of the pandemic on companies. Have revenue or profit margins been affected and how? Are there signs of recovery or even growth?
Several months down the track from the government implementing the initial strict lockdown measures, companies are now more aware of the impact the pandemic has had and may continue to have in the coming months. This will be considered in valuations.
PEM Corporate Finance have valued and advised on the sales of many knowledge-led businesses such as management consulting firms. Some examples are highlighted on our Business Services sector page. Recently, our team advised ATP Architects + Surveyors on their sale to RSK Group, on the sale of a recruitment firm to a European buyer, and the buyout of a pharmaceutical regulatory consulting business.
Get in touch with the PEM Business Valuations team to discuss your business valuation requirements or learn more about our process for valuing business.