Valuing a consultancy firm goes far beyond applying an industry average multiple. Buyers focus on sustainable EBITDA, consistent growth, risk exposure, market timing, and strategic fit before deciding what your firm is truly worth. Multiples can vary dramatically depending on size, niche, and economic conditions, while earn-outs often bridge valuation gaps. Knowing what drives profit and valuation multiples—and avoiding inflated broker promises—can greatly improve your final sale price and long-term returns.
Here, I spend 5 minutes detailing how buyers and investors assess the value of your firm.
The firm’s EBITDA provides the basis for calculating how quickly the sale price might be recouped by the buyer. This is used because it is seen as a more reliable estimate of the real profits generated by the firm because it excludes things (i.e. the ‘ITDA’) that vary depending on country, financing structure, or investment decisions.
Projected EBITDA growth may shorten payback, and earn-out targets can resolve valuation disagreements between buyer and seller expectations.
Buyers ideally want sustained, growing revenues for at least three years, and projections of the same for a subsequent 3 years. A minimum of 20% EDITDA and 20% growth for the previous three years is the basis for a good price.
Buyers and investors typically value a firm at between 5-12 x EBITDA. And it is usually worth focusing as much on the multiple as the profit. In a well-run firm, a 5% EBITDA increase is often harder and less valuable than a 1x multiple increase.
Beware of Average Multiples as a Way to Value Your Firm!
Twice this month, I saw questionable company valuations from a broker and insurer relying on vague “industry average” multiples.
Even if you use this as a baseline and adjust it for growth, client risk, founder risk, and IP, you can still misvalue the company by up to 50%.
Why?
- You only really know the exact value of your firm when the earn-out is over. This can be 3-4 years after the deal is done.
- Industry averages are a nonsense. Bigger firms tend to drive a higher multiple and the sub-sector within each industry is crucial (for example, the consulting industry average is 8, but if you are a 500 person AI-consulting firm, your multiple might be 15; if you are a 15 person HR consultancy firm, your multiple might be 4).
- It depends who else is on the market when you decide to sell. More supply = lower prices (Economics 101).
- For strategic buyers, your value is very much dependent on your fir and synergy with their existing services (and culture). If the Porgy to your Bess is not buying, then your value is likely to be lower.
- Current macroeconomic conditions—including capital availability, debt costs, and inflation—directly affect your firm’s projected future returns and overall value.
- The sales process. A bad choice of broker (e.g. one that is doing their favourite buyer a favour), poor negotiation tactics, or the business development effort of the firm dipping during the sale can not only decrease the firm’s value, but also scupper the whole deal.
- Dodgy banks and brokers: estate agents know that offering a higher valuation often wins the seller’s contract. The same is somewhat true of companies. A broker/bank which says ‘I’m sure we can get you a multiple of 20’ is likely to win more business than one which gives you a realistic valuation.
- Luck: when I do a valuation/due diligence, I ask 300 questions of the leadership, undertake a review of key documentation, interview the senior team, do a detailed competitor analysis, review recent deals of similar firms, and look to see which companies might fit best with the seller. Despite this, it is still rare to get the valuation spot on.
- There are 6 other ways to value a firm other than the multiple route. Consulting favors the multiple method, but buyers often combine several valuation approaches to determine their preferred purchase price range.
So, seller beware! Find the right broker, don’t listen to inflated valuation figures, hope for the best and expect the worst.
