How To Sell A Consulting Business (Increase Your Firm’s Value)

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Interested in selling your consulting business?

Even if you’re not right now — or don’t imagine yourself selling it for many years — you should learn how to sell a consulting business.

Why?

Because building a consulting business you *could* sell will help you build a more strategic, scaleable and valuable firm.

By the end of this article, you’ll learn…

  • All about consulting business valuation
  • Our “consulting business bottlenecks” exercise for how to increase your firm’s value
  • The 6 steps to selling your consulting business
  • And how to get help building a consulting business you can sell.

Ready? Let’s dive in…

Consulting Business Valuation: How It Works

When you want to find out how much your consulting business is worth, you measure its value — a concept known as business valuation.

Business valuation helps you understand the value of your consulting business if you decide to sell it.

Understanding Different Valuation Methods

To get a rough estimate of your consulting firm’s value, here are a few of the most common methods:

  • Multiple of Revenue: Multiply your annual revenue by a revenue multiple that typically ranges from 0.5 to 2 times, depending on factors like growth potential and client concentration. For example, if your firm generates $1 million annually and the industry standard revenue multiple is 1.5, your business would be valued at $1.5 million.
  • Multiple of EBITDA: Multiply your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by an EBITDA multiple, which usually ranges from 3 to 7 times. If your EBITDA is $500,000 and the typical multiple is 5, the estimated value would be $2.5 million.
  • Multiple of Seller’s Discretionary Earnings (SDE): SDE is the total financial benefit to the owner, including earnings and other owner-specific financial benefits. Multiplying SDE by a typical SDE multiple of 2 to 4 can also provide a valuation. If your SDE is $700,000 and the multiple is 3, the estimated value would be $2.1 million.
  • Capitalized Earnings Method: Divide your net profit after taxes by a capitalization rate (the expected rate of return for the buyer). For instance, if the net profit is $400,000 and the capitalization rate is 20%, the business valuation would be $2 million.

These methods offer a starting point for valuation but may vary based on several factors, including market conditions and the unique aspects of your firm. Working with a professional valuation expert or mergers and acquisitions advisor can provide a more accurate estimate.

Analyze Your Business Departments

Think about the different parts of your consulting business like separate teams or departments. Each department plays a role in making the firm valuable.

  • Marketing: This department helps attract attention from prospective clients. If your marketing team continually attracts clients and builds your consulting pipeline, your consulting business will be worth more.
  • Sales: This department helps close leads and turns them into paid engagements. If your sales department has strong processes for turning leads into paying clients, it will show buyers that the firm can continue to make money after the sale.
  • Fulfillment (Delivery & Product): This department manages how services are delivered to clients. It makes sure clients are happy and that the firm can handle more projects without problems. If your operations are smooth and clients keep coming back for repeat business, your firm will be more attractive to buyers.
  • Operations (Includes Finance, HR, etc): This department takes care of the firm’s people and financials. It makes sure your people are happy, and your firm profitable. A strong team shows that your business can attract and retain talent. Strong finances shows that your business is healthy and stable. If your firm has great peopole, minimal debt, and good cash flow, buyers will see it as a safer bet.

Identifying and Addressing Bottlenecks

A bottleneck is anything that slows down your business or makes it less efficient. Fixing them will make your business worth more.

  • Manual Processes and Customization: If your employees are doing a lot of work “by hand” or customizing everything for each client, your firm will tend to have lower margins and find it difficult to grow and scale without pain. Automating routine tasks or creating a standard way of doing things (like with productized consulting) can help your firm handle more work faster.

  • Lack of Systems/SOPs (Standard Operating Procedures): Without clear instructions or systems, every task can be handled differently, leading to mistakes or delays. This leads to inefficiencies and waste. Building SOPs means everyone on your team knows exactly what to do and how to do it, which makes your firm run smoother.
  • Reliance on the Founder’s Time: If your consulting business depends too much on you, the founder, it could be a problem when it’s time to sell. If all the major client relationships are with you, buyers might worry about what happens if you leave. If you’re the one doing all the sales, where does the business come from when you’re gone. Keep in mind ‘gone’ doesn’t have to mean you sold the business. It could mean that you’re on holiday for a few months or out sick. Finding ways to replace yourself in key areas of the business not only will reduce dependency and risk, it also makes your business more valuable.

The more you work on addressing these areas the more valuable your business will become. This in turn also makes it more attractive to potential buyers — and can help you get a higher price when and if you do decide to sell.

Consulting Business Bottlenecks Exercise: Increase The Value Of Your Firm

At our most recent Consulting Success® Mastermind event in Miami, we taught the “Path To Scalability” exercise.

This exercise is designed to help you outline your firm’s bottlenecks and put a plan in place to overcome them.

Doing so will help you build a more strategic and scalable firm — one that will be easier for you to market and sell to potential buyers.

The Path To Scalability Exercise

Scalability is the cornerstone of growth, but it requires eliminating bottlenecks that hinder progress. In this session, we’ll dive into how you can overcome common obstacles to take your business to the next level.

First, mindmap all the bottlenecks that are getting in the way of your firm’s scalability.

Here are three examples of bottlenecks:

  1. Manual processes
  2. Lack of systems
  3. Reliance on founder’s time

Second, list the top 3-4 bottlenecks that you identified. What are the potential solutions to overcome these?

Focus on actionable steps to remove limitations and streamline processes.

Here’s an example:

BOTTLENECK: I spend 2 hours a week on my business bookkeeping – this takes me away from client prospecting.

SOLUTION: I need to hire a bookkeeper or service to help with this.

ACTION STEPS:

  1. Ask peers for referrals or services they’ve used
  2. Engage a recruiter
  3. Start searching
  4. Hire by June 1

Third, create a matrix, consolidating what you learned from this exercise.

List out your next steps to eliminating these bottlenecks, and your deadline for when you’ll complete each action.

By writing down each bottleneck — and putting together a plan to overcome each one — you’ll systematically make your consulting firm easier to grow and scale. And you’ll make it more valuable and enticing to buyers.

Additional Ideas For Maximizing Your Firm’s Sale Price

When preparing your consulting business for sale, focus on the areas below to maximize its value and attractiveness to potential buyers:

  • Financial Performance: Boost profitability by increasing revenue (like with value pricing), controlling costs, and maximizing margins. Keep financial records accurate and well-organized.
  • Client Base and Revenue Streams: Diversify your client base to reduce risk and focus on building recurring revenue streams.
  • Operational Efficiencies: Streamline processes and invest in technology to improve efficiency and scalability.
  • Human Resources: Develop a strong team and culture and ensure business continuity.
  • Branding and Marketing: Strengthen your brand and expand marketing efforts.

  • Growth Potential: Create new consulting offerings and to highlight future potential.
  • Transferability: Document processes and client relationships to ensure the business can operate smoothly without you.

6 Steps to Selling Your Consulting Business

In Unpacking the M&A Process for Consulting Firms (6 Stages), Jonathan Baker outlines 6 stages of selling your consulting firm.

I’ll summarize those below.

1. Marketing Your Firm

At this stage, you’ll bring in an M&A advisor or broker.

They’ll help you find the right buyers, tailor your story, and allow you to continue focusing on your business.

Here, you’re focused on generating interest from potential buyers so that you can have many initial conversations — which is step 2.

2. Initial Conversations

At this stage, you’ll have conversations with potential buyers.

Typically, these are 45-60 minute video calls. Your broker or advisor will also join.

On these calls, you’ll give an overview of your firm and goals. Then, the buyer will give an overview of their goals. After that, you’ll both ask questions to each other about those goals and the firm.

After the initial conversation, both parties will decide whether or not to continue the conversation and pursue the sale.

3. Letter Of Intent

At this stage, you and the potential buyer will sign a Letter of Intent (LOI).

An LOI is a non-binding agreement that gives the buyer a few months to conduct due diligence on your consulting business.

It stops you, the seller, from shopping around your firm during this period.

An LOI is a strong indication of interest from a buyer. It always precedes a sale.

4. Due Diligence and Negotiating Purchase Agreement

At this stage, the buyer will do due diligence on the business. You’ll work with them to help them with their more detailed research, and you’ll fine tune your offers.

If all goes well, you’ll proceed to a purchase agreement. This is a binding contract that you’ll both sign to transfer ownership of the firm from you to the buyer.

5. Closing

If your deal makes it out of due diligence, and both parties agree to the deal, then you’ve now closed the sale.

6. Earn Out Period

At this stage, you can expect to receive 30-50% of the total purchase price cash upfront.

However, buyers want to make sure they’ll be able to continue earning money from the firm. So, when selling a consulting firm, you can expect partial payments tied to an earn-out period that can range from 1-5 years.

Some of the common milestones for payouts include:

  • Continued employment
  • Client retention
  • Top-line revenue targets
  • EBITDA targets

“The earn out period is one reason why it’s good to start thinking about selling before you’re ready – because you’ll likely end up still working for the buyer for a few years even after closing, if you want to maximize your earn out.”

-Jonathan Baker

Expect 6 months to a year to go through all these steps.

If you have a strong M&A team around you, you don’t need to know the finer details — you just need to understand the bigger picture.

Get Help Creating A Consulting Business You Can Sell (Even If You Don’t Want To)

Are you looking for customized help to build a more strategic, scaleable, and sellable consulting firm?

You might not want to sell your firm right now. But someday you might.

Why not build a firm that you could sell?

The irony of building a firm you could sell — even if you don’t want to — is that you’ll end up building a business that can run without you. And that will give you more freedom, flexibility, and leverage.

In our Clarity Coaching program, we’ve helped over 1000 consultants to build a more strategic, profitable, and scalable, consulting business.

Learn More About Clarity Coaching

We’ll work hands-on with you to develop a strategic plan and then dive deep and work through your ideal client clarity, strategic messaging, consulting offers, fees and pricing, business model optimization, and help you to set up your marketing engine and lead generation system to consistently attract ideal clients.

You’ll learn how to make more money with every project you take on — and how to land more clients than ever before. Learn more about Clarity Coaching and get in touch to talk about your situation and goals.

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