A 100% services business is only worth guaranteed contracts and the residual $ Value of the contracts… plus some additional value for the pipeline/forecasted business plus goodwill for brand name.

I tend to evaluate a few businesses per quarter to acquire them. So, if I buy another services company, I would look at:

1. How much guaranteed revenues they have for x months/years and give them a multiple of that. So if that company has a 1 yr contract for $1MM, with an option to renew… I could give them 1.5MM, effectively, buying 1.5 years of their revenues.

BUT I would tie the payments to the principal being in the business until that value is obtained.. at salary and payouts tied to revenues recognized.

2. Then I would look at their forecast.. let’s say their pipeline of new business is $1MM and their average close ratio is 25%, means that they’re guaranteed another 250k of new business. I would give them 1.2x of that, tied to the business actually closing.

3. Then I would look at their brand name for goodwill purposes.. in other words, how good is their lead generation engine. I’d assign a $ value to that.

Do this math for your own business. Let’s say that, as of now, you have visibility into only $500k guaranteed $s over the next 12 months.

Like many services businesses, it probably has $0 in pipeline for new business.

Like many small services businesses, it probably has 0 in brand name recognition / value.

Would YOU pay a whole lot for YOUR own LLC at this moment?

Would YOU pay an outright cash payment upfront? For most small businesses , the whole business is intimately tied to the principal – YOU.

Categories: Marketing

Ronnie Guha

I work with healthcare leaders on operational and strategic initiatives. Medical practice leaders reach out to me when they want to grow their group with an eye towards scaling it to exit. If I can help you, feel free to get in touch with me.

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