What Factors Can Decrease the Value of Your Firm?

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There is almost always a gap between the economic value and price any firm may command  and there are many factors which affect this.

Supply and demand certainly has a bearing but most of the determinants of the final price are at the micro level, risk v reward and the details of the firm at hand. Whilst trite, and barring any special value, it’s not inaccurate to say that something is only worth the price a willing, but not anxious person, is likely to pay.

Let us dive in and consider some of the common factors affecting value.

Profitability 

Whilst most buyers will consider the ‘potential reasonable profitability to them’ it is important that your profits and the factors affecting them are reasonable or within benchmark. These will differ depending on the size of your firm but 30% adjusted maintainable profits after reasonable remuneration to the owners is a good guide. 

Key Client Risk

We all love nice big client groups but having massive client concentration (fees to one group) is a big risk for a buyer or merger partner. Managing this over time will help value. Otherwise, some strategy to de-risk, like a special retention clause, can help.

Staff Structure

To some extent, this would be reflected in profits as described above but in an ideal situation you should aim for a nice pyramid of staff with managers, seniors, intermediates and graduates:  a good balance of experience and youth.

De-risking Deal Terms

Two massive factors that can de-risk a transaction for a buyer and maximise price for the vendor are the amount of retained consideration and the length and terms of the vendor’s transition. A nice long transition at fair market salary and reasonable retention are a win-win all round. 

Business Issues

This could be a very long list but a few very common issues that are controllable with some planning include:

  • Manage your lease, the shorter the better, that way you don’t need to add office location dependence to the long list of requirements for a likely buyer or merger partner

  • Clean up your database. Make sure you have emails and mobiles on record for your clients at minimum.

  • Get rid of the paper…. trust us, no-one wants it!

  • Have decent IT and be remote work capable

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