Factors to Consider When Valuing Your Engineering Firm
By Amos Gibello
You’re the owner of an engineering firm which you’re thinking of selling. Or maybe you’re trying to establish its worth in consideration of securing loans, partnerships, outside investors or a merger. Or you’d like to get a better handle on your net worth for estate purposes.
Whatever the reason, here are some of the leading factors to consider while estimating your firm’s value.
Revenue Growth — How have you done over recent years? Trending upward or down? Be sure to consider your backlog with your projections to the end of the fiscal year. Strong backlog and a history of increasing revenues equate to higher value.
EBITDA — In other words, when your buyers, lenders or investors get a good look at your books, what are the actual profits that they will see? These figures most closely resemble the cash profits they might expect to realize from day one.
The talents of your leadership team — If you leave the organization, what’s left? A leadership team that’s near retirement or a dynamic core with experience, but relative youth and long-term staying potential? Take an honest appraisal and do everything you can to build the profile of your team or keep your best people on board and committed.
Customer mix — Interested outside parties will carefully scrutinize your client roster. What industries or sectors are they in? Too much reliance on one group — healthcare, energy, government or education, for instance — can backfire if there’s an economic downturn and that sector sees construction budgets cut. Therefore, you’re better off being able to show a more diverse blend of customer types.
Contract mix — Prime contracts are generally better than sub-contractor business in that you’ll be paid faster and cash flow will look better. After all, you only have to bill one party; not wait for your client to first be paid. Similarly, a lot of smaller contracts is better than one large one. If your one leading client disappears, prospective buyers or investors can’t help wondering if your firm will too. And finally, full and open contracts can be better than set asides, in that the set asides might disqualify many potential business buyers.
Barriers to entry — Why should a prospective buyer or partner be interested in your engineering firm? After all, they can just start their own. That’s why you want there to be significant barriers to entry. For instance, if your reputation within the marketplace is so powerful and your brand so strong, it might be unlikely that a potential competitor could win an adequate number of decent contracts to turn a profit in the near term. If that’s the case, there is value in your firm because it is less likely that revenues or EBITDA are at risk of significant impact from new firms entering the marketplace.
Does this help? Please call if you need assistance in better positioning your engineering firm for a sale or to take strategic steps to upgrade its value.
Amos Gibello, CPA performs tax and consulting services at Wiss & Company LLP for a range of clients, but with a unique focus on engineering firms. Reach him at (973) 786-2277 or by emailing email@example.com.