February 13, 2023
In this snapshot we have a closer look at professional service companies – law firms, accounting firms and tax consultancies – and their value drivers. All in all, we analysed the customer portfolios of 71 firms acquired between 2012 and 2021.
The leading players carry some oft he most famous trade names in B2B services. However, brands play a very minor role in corporate transactions. Typically, brand names of the target are replaced by the acquiror’s name after the acquisition. Such rebranding is quick, cost effective and causes no harm for the business. Not surprisingly, brand value accounts for only 1.3% of enterprise value on average.
However, what really counts is the customer portfolio – in particular its structure, its margin, its tenability and its protection. Customer value accounts for 33% of enterprise value, at an average pre-tax profit margin of 11% on revenues. We find average attrition rates of 10% annually.
There is a strong relation between the customer profit margin and valuation multiples. The higher the sales multiple of the acquired firm, the higher the customer-specific profit margin (see chart below).
To a large extent, professional services is people’s business. The relation is between key persons on both sides. The risk in acquiring people’s businesses is that key persons decide to leave. Therefore, it is vital for the longevity of customer relations to have both retention programs (i.e. employee participation) and non-compete clauses for key people in place.
In addition to customer value, goodwill accounts for 56% and tangible assets for 9% of enterprise value.
Customer relations are typically valued using a multiperiod excess earnings approach, based on the projection of historic profitability and retention data. However, there is ample data available for market-based valuation approaches and benchmarking of customer relations and their valuation. Accordingly, MARKABLES has comparable data from almost 13.000 different customer portfolios on file.