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02

the
fundamental
components
of value

Dom Moorhouse
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the guide i wish id had to building and selling a professional service business.

I had the privilege of sharing the Moorhouse journey with


Dom, as one of his co-directors, and can relate only too well to
everything he describes so brilliantly. If only wed had a guide
like this to help us on our way! The outcome may not have
been any different, but wed have avoided so many false turns
and blind alleys en route. These guides are essential reading
for anyone setting up in business, particularly in the field of
professional services. I strongly recommend them.

bob hendicott, hendicott partnership ltd


These guides were not around when we embarked on a similar
journey. If only they had been - it would have saved us years in
terms of the journey, 000s in terms of avoiding the common
pitfalls and a head full of grey hair in terms of frustration!

pete austin, director, suiko ltd


Dom has absolutely captured the need to manage the
growth of a business like a project with clear objectives and
deliverables, supported by robust and effective systems. The
sales guide is a must for any professional service firm leader.

paul wilson, managing director, provelio limited


I found the Five-Year Entrepreneur Guides an excellent
summary of the practical solutions required to building a
successful, small-to-medium-sized consulting business. I can
see them becoming a well thumbed text.

tim phillips, global partner, molten and winner of the


london and south east iod director of the year 2012
If running a successful consultancy or small business is
your aspiration then this practical, how to series is highly
recommended. For me, the guides on business planning
and how best to structure your teams and motivate them
were of particular interest. Doms willingness to share his
experience, both good and bad, brought these guides to life
whilst maintaining a pragmatic approach and providing simple
templates and examples.

tanya lightbody, director, ingenuity inspired limited

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about the author


Dom Moorhouse, a former Royal Marines Officer, is the Founder of Moorhouse a
leading management consultancy business. Dom started the company as a singleton
in 2004, grew it to a c. 10m/annum revenue business and sold it to BT in 2008 all
within the five-year target he had set himself. At the point of his departure as MD, the
business was a firmly established presence in the UK professional service sector (and
at the beginnings of an international presence in the US and Far East). The firm, which
continues to thrive, has built a reputation as a trusted partner in the realm of business
transformation and received consistent accolade for supporting such efforts in close
to 50 premier organisations (major government departments/agencies, FTSE/NYSE
100 etc). During his tenure as the MD, Moorhouse won a major national award (MCA,
APM, IBC) every year of its existence in recognition of such work, including multiple
firm of the year plaudits. Dom now enjoys a portfolio career writing and speaking
on the subject of entrepreneurship, mentoring business owners and angel investing in
start-ups. He lives in Bath, England.

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First published in Great Britain in 2012


1
Published in the United Kingdom by
Always Onwards Ltd, The Business Studio, 128 Bloomfield Road, Bath, ba2 2as
www.dommoorhouse.com
Content copyright Dom Moorhouse, 2012
Illustrations copyright Dom Moorhouse, 2012
All rights reserved. This book is sold subject to the condition that it shall not, by way of trade or otherwise,
be lent, hired out or otherwise circulated in any form of binding or cover other than that in which it is
published. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior
written permission of the publisher.
The right of Dom Moorhouse to be identified as the author of this work has been asserted by him in accordance with the Copyrights, Designs and Patents Act 1988.
ISBN 978-1-909310-01-8
A CIP catalogue record for this book is available from the British Library.
Designed and typeset by James Nunn in association with Traffic Digital

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de
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profess ice
serv s.
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DOM MOORHOUSE

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Guide 02
the fundamental
components of value

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Foreword
This book tells the remarkable story of the founding, growth and ultimate sale
of Moorhouse Consulting, a UK-based professional services firm. That this was
achieved within five years is testament to the vision and drive of the author,
Dom Moorhouse. Zero to 10m in sales and 20m in value in five years is the
stuff of dreams for most entrepreneurs in the professional services world but
in this book you will not only find the blueprint but also the detailed how to
instructions to mimic this success.
My name is Paul Collins and I first met Dom in late 2005, almost two years
into the Moorhouse story. I was presenting a seminar for my firm Equiteq called
Proven Strategies to Build and Sell your Consulting firm. This two-day event
was based on my own personal experiences and the material obviously resonated
with Dom. After the seminar we talked about Doms ambitions to build a 20m
value firm within five years of founding; remember, he was two years in at this
stage. Whilst I could not quote many examples of firms who had achieved such
a feat (it took me 15 years of growth to achieve a sale of my own consulting firm)
Dom was resolute and he impressed me with his infectious drive and ambition.
Within a few months I was signed up as a Non-Executive Director and two
and a half years later, in August 2008 (six months earlier than planned), Dom
realised his dream and sold Moorhouse to BT, a UK Telecoms plc and a client
of Moorhouse at the time.
Moorhouse were the perfect client for Equiteq. They devoured all the advice
we and others had to offer and executed with military precision probably
something to do with Doms first career in the Royal Marines! They seemed to
get everything right and still to this day they are the only client we have worked
with who consistently met their quarterly revenue and profit targets throughout
our partnership. It is not an exaggeration to say they became legendary in our
circles and are still now the most quoted firm on best practice from our client
portfolio. If your desire is to build and sell a professional services firm, or even
to understand how to generate sustainable growth in sales and profits, you could
do no better than to follow the Moorhouse example as described in meticulous
detail in this book.
When I was building my own firm, WCI Group, I yearned for a guide to
help show me the way to rapidly grow profits and value. For the first 10 years we
did what most firms do ... we grew by trial and error ... lots of error! We made
every mistake in the book. In 1995, we tried to get external advice and spent
six months searching for books, mentors and advice from academics, the City
and the business world. Nothing seemed to fit our situation so we created our
own plan based on what we called our Eight Levers of Equity Value. That plan
accelerated our growth by a factor of 15 over the next five years and enabled the

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sale of WCI in 2002. In this book you will read about the Moorhouse Multiple
Enhancement or ME programme which was their version of the same idea.
Every firm needs an ME programme. It works and in this book you will learn
how to create your own.
This book is the guide I wished Id had in the first 10 years of WCI. Every
page would have stopped us from making expensive and time-consuming errors.
It is written at a level of detail and with links to further resources like video clips,
tips and templates to make it an indispensable how to guide to grow your firm.
Whether you are just thinking about going it alone or your current growth has
stalled or you want to know what to do beyond just growing profits in order to
build future equity value, this book has everything you will need to keep you on
the right path to a saleable business.
If I am honest, this is also the book I wish I had written myself and I suppose
there can be no better personal recommendation than that! Dom has written
this book in the same way that he built Moorhouse with meticulous planning,
a talented team of contributors and advisers, disciplined execution to aggressive
timescales and with great humility and leadership style. Characteristics that you
will all need to build your Moorhouse story and probably the reason why my
book started but was never finished!
Enjoy reading it; I wish you good luck with your own entrepreneurial dreams.
Paul Collins, Managing Partner, Equiteq LLP (www.equiteq.com)
August 2012

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Preface
You have in your hands now, one of the guides from The Five-Year Entrepreneur
series. If you are the owner of a professional services business or are contemplating becoming so in the future and you want to maximise the chances of
growing such a business to create personal wealth, then this guide is for you.
The Five-Year Entrepreneur series represents the information I wished Id had
ten years ago when my entrepreneurial ambition first started to stir and the
foundations for my own professional services venture (and personal adventure)
were formed. It is the reference I would have loved to have read and dipped
repeatedly back into during the critical years of building my own companys
value. Finally, it is the pragmatic checklist I sought when I entered the most
foreign, and demanding, of experiences the sale process.
I know all this because I had the most incredible of entrepreneurial journeys
progressing from start-up to a multi-million value realisation moment in
less than five years. As always, such a tale of business success is graced with good
fortune and I certainly had the wind on my back at a couple of critical moments (you will get to read more on this part of the story as the series unfolds).
More significantly, however, I was fortunate to have a great team around me
colleagues and external advisors to traverse this path with real focus, structure,
research and discipline. It is these gathered insights, experiences, anecdotes and
practical steps that I want to pass on, plus some signage to the inevitable holes
in the ground we occasionally stumbled into.
I recognise fully having been there just quite how time-poor you probably are. As such, I have broken the series down into individual subject guides,
and each guide is made up of elements that can be digested in part you just
need to pick and choose what works best for you. I know that the technical description can be a bit dry at times so I have also worked hard to mix this up with
the more human story such that you derive the benefit of knowing how such
aspects actually work (or not) in practice. This specially tailored series organisation, and formatting, is all described further within this Introduction.
Why read on?
Well, with the approach that this book series details, coupled with some hard
graft (this is not a get rich easy scheme!), you will significantly, and positively,
alter the forward path of your business in terms of its growth rate and inherent
value. This, in turn, will shorten the time it takes to get you to a point when
such value is of real-world, material significance. A point in time when you can
potentially trade such ownership for a life-changing, freedom-bearing financial
reward.
I have designed the structure of this book series to be a useful companion
to you on your journey. At a high level, it follows the phases you will embark

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on understanding (what the journey will entail, where value lies etc), planning,
building (the guts of the series) and selling. Each of the detailed guides will sit
within one of these phases and, whilst there is a logic to consuming the information in this order, it is all perfectly accessible to the reader who just wishes to dip
in to gain insight in a specific area only.
This brings me onto the overall design. You may have found this sample on
my website (www.dommoorhouse.com) or an e-book store? If you return to my
website, you will see that you can get access to all the currently published guides
in the series. If your interest takes you further and you seek to derive further
value from this structured learning then please note also that each guide has
been specifically configured to work in reference with a number of supporting
resources (tools, templates, interviews, links, discussion boards etc) organised
on the same subject basis. Details on how to subscribe to these additional assets
are to be found on the website.
Finally, a heartfelt wish; however you seek to digest these guides and wherever you are in the entrepreneurial process good luck. You have my utmost
respect and the world certainly needs more people like you. I just hope that this
book coupled with your spark, vision and industry contributes in a small
way to the decisions you take and the success you deserve.
Dom Moorhouse
Bath, 2012

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Who is this Book for?


The simple answer is that this book is for you.
You that is, if you are the owner full or part of a professional services
business or aspire to become so. Indeed, this book is for you if you are just keen
to explore the idea of setting up your own such firm.
Before we go much further, some definitions. By owner, I mean a shareholder in a limited company, or a partner in a limited liability partnership, who
has equity (shares, stock, options) in the business and is, as such, able to direct influence over it and derive gain from it (dividend share and/or a capital gain from
selling shares). I should also perhaps expand on what I mean by a professional service firm as this book is very much focused on the unique characteristics of such
an endeavour. No one definition will suffice here but such firms are primarily
business-to-business and involve the marketing, selling and dispensing of a professional service as opposed to, say, the production and retail of material goods.
Capable people, qualified to discharge such services, are clearly central to such a
business and the billing typically but not always involves a function of their
time. The definition is, however, broad and covers a panoply of service types
from business consulting, accounting, law, advertising, web design, architecture,
engineering, recruitment, financial services, marketing, public relations, research
and so on. Generally speaking, if your firm harnesses the talents of skilled, knowledgeable individuals to provide advice and support to other businesses it is to be
included under this broad umbrella and this guidebook is for you.
Your professional service business may be long-established or, indeed, may
not yet even exist. Starting up such an enterprise may just be, at this point, part
of your future dreams and plans. You may well be, at this current moment, languishing as an employee in a large company wondering if the jam tomorrow
promise is ever going to materialise and looking to take more control over your
career, and future wealth, through such an ambition.
Moreover, The Five-Year Entrepreneur series is really focused on the leaders
who are committed to growing such businesses such that they afford themselves the option of potentially realising capital value from it in the future. This
is perhaps the critical raison dtre for this series of guides and, hence, serves as
the key test as to whether it is really worth reading on.
This is an important and not obvious point so lets pause briefly to discuss
it in more detail.
For some business owners, there is no deep desire to grow their firm (in terms
of people employed, revenue, profit etc). For such business leaders, the potential
upside of growth is just not deemed sufficient enough to justify the inevitable
effort and complication involved. They are simply content with where they are
and enjoy the regular income stream their business provides them. That is fine

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if they are, indeed, enjoying a regular profitable income (putting aside the obvious concern that it is, in practice, very difficult to stand still and not actually go
backwards). It is a perfectly acceptable career, or work-life, choice and certainly
I do not seek to be self-righteous about the deliberate alternative. Its just that
this series really talks to those who have, or plan to have, an explicit ambition to
grow their business.
This does not mean, however, that you will only get value from this book
series if you intend to make a cast-iron commitment to, or goal of, the act of
selling your business; although if your plans are explicit and time-bound in this
regard, it is most certainly for you! As a minimum, I just anticipate that you
want to, through a disciplined plan-to-build approach, position strategic options for such a potential eventuality in the future.
Behind such an intent lies a myriad of personal drivers and goals. This should
include the professional satisfaction and personal growth journey involved in
leading a successful firm. There are few satisfactions greater than knowing that
your entrepreneurism, vision, drive, industry and force-multiplying enthusiasm
is responsible for a small economy on which other livelihoods (and their dependants) prosper also. For certain, such people are needed in abundance to
rescue modern economies from their recent malaise! There will also be a driver,
invariably, for self-determination be that in the form of a greater influence over
your own career path and/or a desire for greater wealth on which such future
flexibility can be based. There is nothing to be ashamed of in such an admission conversely, candour with yourself and key others is important here. It is
perfectly possible to reconcile such personal ambition with sustainable, ethical
business development and that is the sweet spot on which this set of books is
going to linger.
In summary, this book (as part of the overall The Five-Year Entrepreneur series) is for anyone who is, or who aims to become, an owner of a professional
services business and has a targeted intent to grow such a business in order to
potentially at least derive a personal wealth-creation point in the future.

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The Five-Year Entrepreneur Series


The Five-Year Entrepreneur series is organised into four parts and contains 21
guidebooks that cover everything you need to know to create ownership wealth
in a professional service business.
The two guides in Part 1 (Understanding) show you the personal attributes
and commitment you will need for the journey ahead (Guide 01 Personal
Motivation and Circumstance) and the fundamental components of value in a
professional service business such that you can embed this knowledge in every
future, firm-growing decision you make thereafter (Guide 02 The Fundamental Components of Value).
In Part 2 (Planning), I introduce you to professional service business models
and describe the business planning you need to do at start-up and embed as a
critical, repeating capability thereafter (Guide 03 Business Planning). I also
look at how to optimally organise your business for growth and value (Guide
04 Business Organisation).
Part 3 (Building) is the heart of the series. Here you will find multiple guidebooks that describe at a practical level how to establish and manage all the
components of a well oiled professional service operation.
Finally, in Part 4 (Selling), three guidebooks will cover this pivotal phase on
the wealth creation journey in order that your firm is well presented to the market, the optimal deal is achieved for all involved parties and your wealth creation
goals are realised.
The overall series is as follows:

Part 1:

Understanding

Guide
Guide

Personal Motivation and Circumstance


The Fundamental Components of Value

Part 2:

Planning

Guide
Guide

Business Planning
Business Organisation

Part 3:

Building

Business Development
Guide
Guide
Guide
Guide

Management Information and Decision Making


Service Propositions and Thought Leadership
Marketing
Selling

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Knowledge, Culture and Communications


Guide
Guide

Establishing a High-Performing Team


Knowledge Management and Intellectual Property

People/Talent Management
Guide
Guide
Guide
Guide

Talent management Recruitment to Exit


Continuous Professional Development
Building the HR Function
Developing the Leadership Team

Operations
Guide
Guide
Guide
Guide

Financial Control
Service Delivery and Quality Management Systems
IM/IS Capability
Estate/Office Management

Part 4: Selling
Guide
Guide
Guide

Preparing for the Firms Sale


The Sale Process
Post Sale and Beyond

Readers Note
The respective guides are being published as they are completed. As such, you
may have your hands on one of the early, foundation books with the remainder
of the series still to be written. Indeed, if this is the case, you can head to the
website (www.dommoorhouse.com) and influence the chronology in which the
remaining guides are produced.

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Guide Elements
This book is designed for the time-poor. Whilst you will get most from it by
reading cover to cover (and any such investment in time to do so will be well
rewarded), it can also be dipped into as per your business challenge of the moment. However you approach it, each guide will have a consistent set of information blocks to further assist the rushed reader so you should look out for the
icons of each:

Aims:
Objectives you should achieve in reading this guide.
Top Tips:
Simple, practical guidance from the coalface.
Links to Resources/Tools:
References to relevant assets contained on the books website or links to
external resources.
Activity:
Signposts an activity you are recommended to undertake to cement your
knowledge or improve your business. These activities will be collated into the
guide checklist for summary reference.
Checklists:
A simple tick box list for those key things to do now.
Motivation Moment:
Quotes and anecdotes that teach or inspire.
Cautions:
Things to watch out for, traps to avoid.
Case Study Corner:
A relevant aspect of the Moorhouse story to illustrate a point.
As a minimum:
Final section giving you the least you need to know.

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UNDERSTANDING
All men dream: but not equally. Those who dream by night in
the dusty recesses of their minds wake in the day to find that it
was vanity: but the dreamers of the day are dangerous men, for
they may act their dream with open eyes, to make it possible.
T. E. Lawrence, The Seven Pillars of Wisdom

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GUIDE 02

The Fundamental
Components of Value
AIMS

In this guide, you should aim to:


U Understand how a buyer will typically value a professional
services business.
U Understand how to go about growing this value in your
business.
U Start thinking about the implications of this in terms of your
business organisation and operation in the future.

CAUTION
This guide dwells on the topic of value specifically as it refers to the
financial price a buyer would be willing to lay out for your company in
the future. Helping you to understand this is an extremely important
step in the context of a book that seeks to guide its readers to a stage
when such value has a real, potentially life-impacting, quality. That
said, I am conscious that what I am about to describe can come across
as somewhat sterile, financial or just a bit too self-obsessive about
internal matters. Little mention is made of the work you do, or the
clients you serve.
For the complete absence of doubt, therefore, let me make one
point abundantly clear before we set off. All this talk of your own value
is for nought if you are not primarily obsessed with, and successful in,
delivering tremendous value to your clients in whatever services you
offer as gauged by them. In order to even get started on this topic, I
have to assume that this is your foundation. With that important point
made, lets get going

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THE FUNDAMENTAL COMPONENTS OF VALUE

Valuing the Professional Services Business


There are a number of valuation methods used to value companies generally
ranging from asset valuation, liquidation or book value, the modelling of future
income streams through to industry-specific rules of thumb.
When it comes to professional services businesses, however, one viewpoint
comes to the fore. Simply put
Valuation is driven by the expectation of future profit.
That is, a buyer is primarily interested in the total amount of Owner Benefit
they can extract in the future based on a business historical trading performance
and its current organisational capabilities. As such, the most common valuation
method is a variant of:
Profit x Multiple
Typically, the value used for profit in this equation is:
EBITDA x Multiple
Where EBITDA stands for Earnings before Interest, Tax, Depreciation and
Amortisation. In reality, there is often little by the way of asset depreciation and
amortisation in a typical professional services firm, so you will also see common
reference to the simpler EBIT (Earnings before Interest and Tax) variant.
Analysts will also look at top line revenue multiples, but this is done typically as a crude proxy when they suspect that the reported earnings figures are
not an accurate representation of the actual levels of discretionary cash flow.
For example, the owner of a business may take some of the discretionary cash
flow out in the form of a bonus above the profit line and hence artificially
depress a reported EBITDA figure. This, in turn from the perspective of an
external analyst reviewing a companys purchase price could lead to a very high
EBITDA multiple. What they are not privy to is the adjustments often made to
reported EBITDA figures, in the course of such negotiations, in order to bring
them back in line with normal treatment. As such, aware of this blind spot,
analysts often examine the revenue multiple of a reported sale price also as this
top line figure is clearly less susceptible to such tinkering.
In relation to your business, however, a typical sale value discussion will involve the buyer getting access to a true, or normalised, EBITDA figure (for the
last twelve months) and then a critical negotiation around the firms EBITDA
multiple will ensue.

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THE FIVE-YEAR ENTREPRENEUR

Lets pause there because this is important.


One simple way of looking at this, is that the multiple is the number of years
a buyer would have to own the firm in the future, trading at its current level of
profit performance, before their purchase outlay is paid back. A buyer is, however, not expecting static growth and, indeed, you are very unlikely to be engaged
in such a negotiation if your company is not on a clear profit growth trajectory.
Rather, the multiple, therefore, is an indication of the quality of the companys
trading capability. Understanding how this quality attribution is made up in the
mind of the average buyer is absolutely critical.
Another way of coming at this, from the perspective of a buyer financier, is
as follows. A typical buyer will seek to recoup their outlay in, say, three to five
years. Let me assume, prudently, that you will end up negotiating with a bullish
buyer who seeks to recoup the investment in three years. Based on your historical EBITDA growth figures (and perhaps their ability to make even greater gains
through cross-efficiencies) they will project the EBITDA that will be produced,
post acquisition, over this period. And, this figure is what they are willing to pay
now. Dividing this by your current EBITDA is, therefore, the effective multiple
they are willing to pay based on this payback horizon. By example, from the
chart below, if your EBITDA is growing at per annum, such a buyer would
countenance paying a five-times multiple.

Figure 2.1: Illustrative EBITDA multiples a financier would be willing to pay based on a three-year payback period
(against a range of projected annual EBITDA growth rates)

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THE FUNDAMENTAL COMPONENTS OF VALUE

This is a pure financial analysis, based on an arbitrary (but typical) payback


period; notwithstanding, you should be aware that an analysis of this type will
certainly have a key place in the negotiating buyers mind.
There is another axiomatic point to be drawn from this. In that your objective is to maximise this compound value, but your management time is finite,
on what side of the EBITDA x Multiple equation should you focus (or is it just
a case of even distribution)?
Well, of course, growing EBITDA is a priority. You will not even get to be
in the game if you cant demonstrate this management record. But, and it is
a big but, within parameters. As soon as you are achieving healthy levels of
year-on-year profit growth (say or greater), you are very likely to be better
off deliberately skewing your time and effort towards the Multiple (or quality)
aspect as far greater gains to overall value can be made here.
To illustrate, consider a business that is making m of EBITDA and advancing well at, say, EBITDA growth per annum. In terms of its business infrastructure, and qualitative assessment, lets just say a buyer would value it as a
x EBITDA company. Next year, therefore, if growth continues on track, the
company could be worth m (.m x ). If the owner really bust a gut on the
profit growth side (achieving EBITDA growth), maybe they could get this to
.m (.m x ). Suppose, however, that growth rates were held and managerial
effort focused more on improving the qualitative aspects of the firm thus moving
the buyers multiple offer to x EBITDA or an .m business? You get the point?
Clearly this is a simplification but it is a really useful one to make at the heart
of everything you do. Once healthy profit growth is established, you will need to
focus on developing the elements of the business that make this sustainable; that
improve your qualitative value in the eyes of a potential buyer. You will only be
able to grow revenue and profit so fast (indeed, you may damage your business
by growing too quickly) but you can make significant strides in the more elastic
aspect of your companys multiple value with focused attention to this aspect.
Understanding this point, and having an awareness of the components that
make up this qualitative multiple, is therefore critical to your future business
success. This guide is, as such, one of the most important for you to fully absorb
before progressing further.

CAUTION
If the previous section touched on what value is in the context of a
professional services firm, it is really important conversely to be
aware of what it isnt.

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THE FIVE-YEAR ENTREPRENEUR

The value of your business has nothing to do with how long you
have been trading per se; only how long you have been trading in
profitable growth. It also has nothing to do with the potential egotrappings of running a business; for example, how many people you
employ or how large and shiny your office is.
Finally, it has nothing to do with how hard you are working or
have worked historically. If only there was always a direct correlation
between hard work and value generation, the world might seem a
fairer place. The truth is, however, that the vast majority of business
owners are working hard; it is just that this needs to be coupled
with smart stratagems and decisions that actually impact the value
equation just described, for this effort to be relevant.

CAUTION
Another aspect you should really guard against is a revenue growth
line full of peaks and troughs. Potential buyers will be very wary of
this as it tends to point to a company with a small portfolio of clients
(and the vagaries of their on/off purchasing decisions).

So, by healthy profit I mean steady, consistent growth that is a function of a


growing client diversification.

A Value Map
There are many ways of coming at the question of where value lies in a professional services business. What I have just covered is the classic valuation formula.
This book is fixated on how to build value in your business, so I am also going
to spend time discussing management focal points, strategies and the practical
steps that support you in this regard. The crossover between valuation techniques, generic business-enhancing strategies and specific professional service
focal points can be confusing; as such, the following schematic (a Value Map)
serves to illustrate their interconnections.

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Figure 2.2: A professional services firm value map

My areas of focus are the top and bottom layers of this map. The middle layer
describes the high-level generic strategies open to any business. On this layer,
A and B should be obvious. Point C talks to the efficiency by which you move
working capital around your business (the oil in the system). The more efficiently you chase down client invoices, for example, the less exposed you are to
requiring bank loan (with interest payment implications) to cover any periods
of indebtedness to your own creditors. Hence this aspect impacts your multiple
(your cash handling will be a key point of market scrutiny). Whilst points A-C
can be gleaned directly from your financial statements, point D is the more subjective aspect of your capability/culture/brand/ethics as externally-assessed.
By showing this all together, I hope you get a sense of the interconnectedness
of the topics covered. I also wanted to demonstrate, before we get going, that my
practical focus on the bottom layer of this Value Map represents a comprehensive approach to the task of lifting overall value.

Profitability Explained
It should be clear to you, if indeed it needed reinforcement, that profitability
(and profit growth thereafter) needs to become your fixation if you are ever to
build a company with value.
As the old maxim goes:
Revenue is Vanity, Profit is Sanity, Cash is Reality.

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In order, therefore, to protect your sanity and your future wealth potential
we dwell now on how profit is derived and measured in a typical professional
services firm. As an aside, the cash management point is also rightly emphasised
in this maxim and we will look at this in detail in Guide .
Lets look first at the classic DuPont Formula as it is used to calculate Return
on Equity (ROE) in a typical, industrial company:

Figure 2.3: DuPont formula

In the case of a professional services firm, equity is typically in the hands of


the managing owner(s) (partners or directors are common terms used to distinguish them from the non-equity-owning, salaried staff). As such, Profit per
Owner is the equivalent of ROE in this context. The total assets employed are
effectively a combination of the ownership equity investment (time and effort
of the owners) and the non-equity-owning staff. Financially, the salaries of this
latter group are comparable to fixed-interest, debt-financing assets in a conventional business.
So, for a professional services firm, the fixation is with:

Figure 2.4: Profitability formula for professional service firms

To illustrate, for a small company with two equity-bearing owners, making a


profit of k on m revenue with sixteen fee-earning staff:

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Figure 2.5: Profitability formula example

Guide will cover the central discipline of capturing, and analysing, regular management information (MI) in your business in order that effective actions and
decisions are being made with tempo. You will not be surprised now to know that
this Profit per Owner formula rendition needs to sit at the heart of this reporting
format with sub-levels that mine down into each of the three critical aspects
margin, productivity and leverage.
It is also worth saying now that in managing profitability, you must focus on
each of these elements it is a mistake to omit any one of them from your continuous analysis. For example, if your reporting system focuses on productivity at
the exclusion of leverage, you may erroneously reward an owner who is driving
high personal utilisation and fee rates as compared to a fellow owner, with low
productivity, who is highly leveraged. Yet, the latter (who is managing more junior
staff colleagues effectively) is likely to be putting more profit into the business.
With experience, and a certain degree of experimentation, you need to get to
the optimal profitability blend recognising en route that you always have these
three levers to pull.

ACTIVITY
If your business is up and running, ask yourself how well your current
reporting system provides useful MI on your profitability; specifically,
does the report lead the reader to a balanced view of the three
sources of profit? If it doesnt, then take action to re-design the
format and/or update the way feed information is collated.
LINKS TO RESOURCES/TOOLS
A real guru in the areas I am covering here is David Maister (www.
davidmaister.com). His book Managing the Professional Service
Firm is an enduring classic and I strongly recommend it to your
professional bookshelf.

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Optimising your Profit


So, improving profitability is about managing your margin, productivity and
leverage in an optimal, balanced way. But, what does this mean in practice?
Lets take each in turn.
Firstly, margin. The truth is that margin, in a business that sells peoples time,
is primarily about productivity and leverage (as the main cost will be salaries
directly related to the number of staff in the business). If you are achieving high
productivity (i.e. high fee volume per staff member) and high leverage (i.e. high
numbers of non-equity-bearing, fee-earning staff to each equity-bearing owner),
then margins will tend to be very good. The only reason why they will not be is
if other, secondary costs in the business (e.g. office, support staff, IT equipment
etc) are being poorly managed. That said, whilst such costs need to be carefully
managed out of good business hygiene, avoid the temptation to continually
prune them for short-term profit growth; as it is on such support foundations
that long-term growth will be based. So, in summary, there is a place for margin
management but it is more a tactical aside in relation to the strategic, long-term
impact you can make by focusing your attention on productivity and leverage.
So, what do we really mean by productivity? Starting with the term in our formula:

Figure 2.6: Productivity formula Part 1

Put another way, it is the average revenue earned per fee-earning staff member.

ACTIVITY
This productivity figure is a key one that you will need to have a
really good handle on. Ask yourself, do you know what the industry
average is for your sector? Do you know what your competitors
achieve? What do you think distinguishes those with high revenueper-staff from those with low levels? If you dont know the answer to
some of these questions, start researching into it such that you can
set realistic stretch goals for your business productivity.

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Breaking this down further:

Figure 2.7: Productivity formula Part 2

Taking each part of the productivity formula there is, again, a need to separate
out tactical (short-term) improvement approaches from strategic (long-term,
sustainable) ones. In the former category, sits all efforts to increase utilisation.
This has its place and you are right to be fixated about achieving a certain target
level but be very wary about an overbearing focus once this is achieved. A strategy that seeks to improve utilisation year-on-year is doomed to fail as once
you pass optimal healthy levels, a greater volume of billed days/hours per staff
equates to disenfranchised people, poor morale, low levels of innovation and,
inevitably, an irresponsive business development capability. All of which spells
disaster for longer term value creation.
Rather, the savvy approach is to focus on value or the rates you are able to
charge. This is, clearly, more than just a case of raising your rate card. In order
that your clients can accept this, you need to develop the underlying fundamentals that they value; for example, providing them with first-rate skilled staff,
relevant technical specialisation, thought leadership and supporting resources/
tools/software etc. Moving up the value chain in this regard is central to growing your firms profitability in a sustainable way.
Finally, leverage. This, like the value derived from your average fee rates, is
a strategic issue for your business. Once you have managed overhead costs and
utilisation to healthy levels, it is only by improving your fee structure or your
leverage that the economics of your business will improve commensurately.
This is such a fundamental area, that Guide on Business Planning is going to
cover it in some detail. Suffice to say for now that leverage is the ratio of your
equity-bearing owners (maybe just you for now?) to the non-equity-bearing, feeearning staff. As a further detail, leverage concerns itself with the shape of the

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grade structure typically pyramidical beneath the owner(s). A high-leveraged


business has many staff members to each owner, whereas a low-leveraged business has a small number of staff to each owner.
So what is the right leverage for your business? The answer to that is the
highest leverage you can achieve without compromising the value you offer to
your clients for the type of work you do. So, if your work tends to be procedural,
you are able to be higher-leveraged than a business that engages in more specialist, expert tasks. The former type of firm can perhaps add intelligent, relatively
inexperienced juniors to the engagement team whereas, in the latter case, maybe
only a small number of very experienced staff can fulfil the clients requirement.
In short, leverage is about getting the right balance between delegation (ensuring that work is always done by the most junior resource capable of doing it)
and skills matching (ensuring that this meets the skill requirement your clients
problem demands).

ACTIVITY
Guide 03 will cover this analysis in detail but, for now, make a note
of what the average engagement team size, and experience/grade
structure, is likely to be for the types of services you will offer. This
will be an invaluable feed into the more detailed business planning
you need to undertake.

TOP TIPS

Measuring Utilisation
It should be becoming clear by now that setting, and then
managing towards, the right utilisation target(s) for your business
is a key management issue. The topic can be obfuscated with
multiple definitions and treatments; as such, you should aim for
two principles when you discuss utilisation within your business
simplicity and consistency.
By simplicity, I mean that you deliberately limit both the language
set used in this regard and the number of time, or service, codes
you track. By example, some companies refer to utilisation to refer
to all time spent working on useful projects (client and internal). In
such a semantic treatment, it covers all work time with the exception
of being on the beach (or the equivalent phrase on the bench)
when a staff member is essentially awaiting tasking. In this treatment,

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billable utilisation might then refer to the subset percentage of


utilisation that was spent working on client projects. Further, in such
an instance, you will hear the term realisation to refer to the subset
of this time that was actually then billed to the client. This is all well
and good and allows for detailed time analysis but I recommend
you keep it simpler in order that this topic is not just one for your
finance controller but for every member of the firm.
I recommend you use the term utilisation to refer to time that is
actually billable. In doing so, a simple, single communicated target
will remain the right focus for everyone in the fee-earning team.
You should keep it simple also in relation to the number of time,
or service, codes tracked. It is possible to grow a successful business,
in the early years, limiting this to a succinct set (e.g. Client-billable,
Client-non-billable, Internal work, Holiday, Sick). This list deliberately
excludes the On the Beach category as, within a small firm, you
deserve shooting if a colleague is ever completely un-tasked; i.e. that
is anyone not on a client project should be instantly deployed to a
constructive, internal initiative. Of course, over time the granularity of
this time allocation will be expected to grow; for example, to capture
specific internal projects, but you should avoid over-complication
here. There are many large firms who have over-engineered this
aspect to a point where, whilst it is theoretically possible for them to
analyse time across multiple dimensions, they have lost the buy-in
of their staff (who are required to regularly input the data in an everburgeoning time track system) and a focus on the basics.
Bearing in mind that utilisation is effectively a measure of time
spent working (the numerator) over all the hours that it was possible
to work (the denominator), what we have been discussing here is
which numerator to track. The other muddy aspect of the utilisation
calculation concerns choosing an appropriate baseline to use for the
denominator.
This can be a fiercely debated topic; suffice to say the main
options are:

U Working time in a year = 52 weeks x 5 days (x 8 hours) = 260


days (or 2,080 hours);
U Available time (post holidays) = Working time Holidays (public
holidays plus your companys annual holiday allowance); or
U Available time (post holidays and training) = Working time
Holidays Days allocated to training each year.

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I would personally steer you towards the latter treatment. If you want
to develop a sustainable business then you should be deliberately
factoring in an expectation that a certain amount of time each year is
invested in the development of you and your staff (training, internal
communication events etc). You should also expect your staff to
take their full holiday allowance any alpha-male company that
rewards those who dont will ultimately pay for this perverse, myopic
tactic with increased staff attrition and low levels of innovation and
actual effective productivity. If you agree with these statements,
then this version signals this clearly to your colleagues. Further, it
also makes sense for your 100% target to focus on what is actually
set aside for billable time compared with constantly asking yourself
what percentage of your theoretical denominator is the maximum
practically possible.
By way of example, say there are 260 working days in the year
(noting this changes with the fall of weekends and whether a leap
year) and 8 public holidays and that your company offers 25 days per
year holiday allowance and expects everyone to undertake 10 days
training. This leaves an Available Time denominator (post holidays
and training) of 217 days (or 1,736 hours).
Regardless of your choice be consistent. It is futile having
management conversations around utilisation when multiple
treatments are being used. Agree on one, communicate it loudly
and stick to it.

CHECKLIST IMPROVING PROFITS


This checklist can be regularly reviewed to ensure you are
managing your profitability well:

Improve Productivity (by raising price/fee levels) [Strategic]

Earn higher fees through increased value-add to your clients


(increased specialisation, innovation etc).

Market your business better to express the value/benefits of


your services. Sometimes, this is just a case of being more
self-confident about the value you do represent to your clients.

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Target rate increases with your existing clients. Automatic


annual uplifts should be factored into all your contractual
agreements as a default.

Improve Productivity (by reducing variable/delivery costs) [Strategic]

Review associate (contractor) day rates is their premium day


rate justified with the actual level of utilisation risk they are
taking?

Optimise mix of salaried staff to associate/contractors in order


that you buffer the risk (with the latter) of too full a staff beach
between engagements.

Measure profitability by engagement more effectively in order


to improve/reward engagement management performance.

Improve Leverage [Strategic]

Measure the size of your average engagement.

Drive up the size of your average engagement (team size, fee


volume).

Improve leverage (i.e. use more junior resources on an average


engagement) through better delegation, skills training etc.

Ensure you actively manage your targeted leverage model


during HR process (during recruitment and promotion rounds
particularly).

Improve the Client/Service Mix [Strategic]

Remove unprofitable clients.

Improve your qualification process to reduce the incidence of


unprofitable clients.

Remove unprofitable service lines.

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Improve Utilisation (by increasing client billable days/hours per


person) [Tactical]

Measure utilisation more effectively by engagement, grade,


time period.

Reward staff for optimal utilisation levels (e.g. % of collected


fee returns to them).

Manage beach/bench resources more effectively.

Sell more work! [Clearly this is a strategic point, if your


utilisation levels are below a commercially viable level].

Sell longer engagements as this reduces the amount of time


staff spend in the gaps between billable work.

Improve Margin (by reducing overhead costs) [Tactical]

Reduce space and equipment costs.

Reduce support staff costs.

Regular review of all overhead cost items.

Improve the speed of billing and/or cash collection (to reduce


bank charges).

TOP TIPS FOCUS ON UTILISATION


An effective way of keeping utilisation at the centre of everyones
attention is to include it in the staff bonus arrangements.
Moorhouses system was to return 10% of all billable time (our
definition of utilisation) back to the individual as part of the sixmonthly performance review (capped at their target utilisation level
so that we didnt perversely incentivise anyone them to go over this).
This is a great way of keeping everyone aligned to the companys
objectives in this area. The bonus was also contingent on the money
having been collected from the client which gave another great
incentive to those closest to the clients to support the business in
chasing invoices through the clients system. Similarly, during this six-

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THE FUNDAMENTAL COMPONENTS OF VALUE

monthly performance round, we would discuss utilisation target and


actuals achieved with each individual it was a key feature on their
one-page performance sheet (more of which in Guide 12).

CAUTION
By way of a mild caution, I may have given you an impression thus far
that all these management levers and profit improvement tactics are
very mechanistic and distinct. The reality, of course, is that there is
a huge amount of interconnectivity. You pull and improve one lever
over here and another aspect may worsen. As you come to reinforce
your understanding of the points raised in this guide and practice
your ongoing management control of them so you will get a better
feel for these linkages.
It is also worth saying at this point that one of the hardest
management items in this set is leverage. It requires real ongoing
proactivity to arrive at and maintain a target structure. Your hiring
strategy needs to be acutely aware of this target structure; as does
your promotion activity. If you dont constantly track it through such
HR cycles, you will very quickly get out of shape.

TOP TIPS INTELLECTUAL PROPERTY (IP)


This guide focuses on the core profit-generating model of the
professional services firm that of selling time. It is important to
acknowledge also, however, that the best firms supplement this
income stream with really savvy harnessing of their intellectual
property. In the best case, this provides a growing platform of
predictable annuity income through the licensing of software,
information, reports, tools and methods. This is rarely introduced
quickly into your proposition set; invariably, there is a considerable
period of development of any such IP.
What you should introduce from the outset, however, is a mindset that is really alert to such opportunity. By example, Moorhouse
developed an internal repository for the best practice delivery
of transformation programmes. We made a conscious effort to
continuously improve it engagement-by-engagement as well as in
concentrated bursts when we had the capacity on the beach to
take it to a new release level. Eventually, aside from being an
invaluable service delivery tool, we recognised the value inherent

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within it for our clients (as a resource they could


benefit from independent of our support
services). Adding such licence revenue
to the pot is a great place to get to
as it tends to be very predictable,
steady, reliable income.
Developing and selling IP
is not a short-term game
but it is a very smart,
supplementary one.

The Multiple
Enhancers
So, having covered the
importance of profit
as a core component
of value, lets turn
now to the Multiple
component of the
typical valuation formula.
As I mentioned at
the start of the guide,
once profitability is under control this should
be the key aspect of value
on which you turn your
managerial focus. Of course,
the vagaries of the macro
economy, and/or the specific
idiosyncratic circumstances of any
buyer, do have an influence here
but nowhere near to the extent you
have. A sound company, led by an owner
who understands this fundamental point, will
always achieve multiples at the top end of the
trading range, even in a bear market.
The main point being the most important of this guide
that you can, through deliberate decision, investment and activ-

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THE FUNDAMENTAL COMPONENTS OF VALUE

ity, take full control of this value lever. What is more,


you can do so through a systematic approach that
this series is going to lay out for you.
Let me start then by giving you an overview of the elements that you will need to
deliberately build capability in if you
are to grow this Multiple figure. I
call them Multiple Enhancers
and you will not be surprised
to note I have structured
the book along these lines.

Each of the guides in


the Building part of
this series is mapped
to a multiple-enhancer element. Each
multiple-enhancer
guide will lay out
the critical value determinants for that
element and give you
pragmatic advice, tips
and tools required to
enhance that aspect of
capability. In turn, this
is all contributing to your
firms overall ability to produce predictable, quality
profit streams hence you
are building towards that overall
top-of-the-range multiple figure
for your company.
By way of a quick summary here, the table
below gives you an indication of the capability
targets this series of guides will help you progress
towards (as seen through the eyes of a potential future
acquirer):
Figure 2.8 - The Multiple Enhancers

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Multiple Enhancers

Management
Information and
Decision Making

Service
Propositions
and Thought
Leadership

Marketing
7

Selling

A Values-based
Culture and a
High-performing
Team

What a Buyer Will Pay a High Multiple for

Weighting

Evidence of regular, accurate and


well presented financial information
feeding into a fast-moving, decisionmaking process. Critically, this should
demonstrate an accurate revenue and
profit forecasting capability. This is,
possibly, the single most important
determinant of your multiple value.

A clear, compelling set of differentiated


service offerings and thought leadership
(e.g. white papers, articles, books,
software tools etc) that reinforces your
expertise in these areas.

An established marketing capability


that enables you to punch above your
weight in terms of brand projection
and facilitates lead generation through
multiple channels.

A systematic approach to selling that is


not dependent on a few idiosyncratic/
gifted individuals. Rather, there is an
embedded culture/methodology/toolset
that allows all staff to develop and excel
in this critical capability area.

A firm famous for consistently


demonstrating that all its members
have the same value-orientation,
especially as it pertains to high levels
of collaboration, team-working, client
service focus etc.

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THE FUNDAMENTAL COMPONENTS OF VALUE

Multiple Enhancers

10

Knowledge
Management
and Intellectual
Property

11

Talent
Management
Recruitment to
Exit

12

Continuous
Professional
Development

13

What a Buyer Will Pay a High Multiple for

Evidence of tangible intellectual


property assets (e.g. methodologies,
white papers, software tools etc) that can
corroborate the business development
process and/or be directly monetised.
In addition, a deliberate and active
investment in the management of the
firms collective knowledge (connecting
people-to-people and/or people-toartefact as required to solve complex
tasks for clients).

A professional approach to the complete


talent management lifecycle from
recruitment, selection, induction, career
development, continuous appraisal,
reward management through to the
handling of the exit process and liaison
with the companys alumni.

Evidence of competence-based career


structures, and active enablement/
encouragement of skills training, in
order that your staff members are upper
quartile in your selected field of work.

A professional capability (staff, systems,


The HR Function tools) within your firm that is dedicated
to the management of your most
important asset your people. This
capability needs to be right-sized (i.e.
lean but not underweight) and, through
intelligent operation, serves to oil the
whole organisation in the pervading
activity of people/talent management.

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Weighting









THE FIVE-YEAR ENTREPRENEUR

Multiple Enhancers

14

The Leadership
Team

15

Financial Control

16

Service Delivery
and Quality
Management
Systems

What a Buyer Will Pay a High Multiple for

Weighting

An inspirational set of effective and


respected business leaders working
collaboratively, under clear lines of
governance, to drive the business
forward. Collectively, they should have
a comprehensive set of skills that cover
all the key business domains strategic
thinking, client service, business
development, talent management and
internal operations.

A dedicated, professional capability


that manages the companys financial
risk through robust controls, processes
and information flows in order to
ensure optimal cash management and
stewardship of the companys assets.
Specifically, there should be evidence
of rigorous commercial control over
each client engagement from tender,
service-delivery through to time-sheeting,
invoicing and timely cash collection.
This capability should also supervise a
regular business plan refresh. It is also
a logical home (there are others) for
the development of robust business
continuity arrangements.

It should go without saying that a buyer


will always do due diligence on your
client service delivery record. Not only
will they be looking for consistently
excellent levels of service (backed up by
client appraisal and testimonial) but also
for the systematic reasons/sources for this
(i.e. that you have a quality management
system in place).

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THE FUNDAMENTAL COMPONENTS OF VALUE

Multiple Enhancers

17

IM/IS Capability

18

Estate/Office
Management

What a Buyer Will Pay a High Multiple for

A coherent IM/IS strategy that equips


and enables the company to operate
effectively with regards to deployed
applications, systems, equipment,
infrastructure and support services.

Any property owned or leased by the


company is cost effective and serves to
enhance client service delivery and/or
internal operations through its location
and ergonomic design.

Weighting



Table 2.1 - Buyers view of the Multiple Enhancers

CASE STUDY CORNER

Organising around the Multiple Enhancer Idea


When I started Moorhouse Consulting in , I set out with a deliberate intent
to build a company that could at least as a strategic option release equity
value within five years of formation. As I will cover in Guide , this objective
was a clearly stated one within my inaugural Business Plan (penned pre start-up)
and, as such, was a well-understood one within the entire business.
I was, consequentially, obsessed with the question of where does value live
in a professional services firm? from the outset and would seek to read anything
on this topic I could lay my hands on. If only this book had been around then!
As soon as the firm grew from me, as a singleton, to a size whereby we needed
some internal, organising structure (this was fortunately the case within the first
trading year), it seemed logical that we base this on the elements of value-build.
In these early years, I spotted a notice for a conference, in London, on the
subject of Proven Strategies to Build and Sell your Consulting Firm. It was
clearly a very pertinent title for an ambitious new business owner and I was
quick to book a place. The day was an extremely useful one but the star of the
show was a presenter called Paul Collins. Paul had previously built and sold a
consultancy business (WCI) and gave an excellent talk on the topic of How
to Value a Consulting Firm. It was, by some margin, the most intelligent
articulation of this matter I had come across in my research to that point. I
immediately contacted Paul and requested that he join our forming Board as
an adviser (we will cover Boards and the value of non-executive directors in

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THE FIVE-YEAR ENTREPRENEUR

Guide ). Fortunately for me, he agreed to do so.


Pauls talk included the concept of growth levers and this, along with my own
views on the matter, was a feed into an (internal) project team design structure for
Moorhouse based on what I called the ME Wheel (Multiple Enhancer Wheel).
The term Multiple Enhancer was somewhat mechanical so, in time, ME came
to stand for Moorhouse Enabler. Truth be known, after time, most forgot what
ME (pronounced Em Ee) stood for but it was an acronym that stuck. Everyone in the firm belonged to at least one such ME Team and every new joiner
was invited to join one. It became our primary means for driving the collective
ambition we had to grow the architecture of the firm on which sustainable
growth could be based and on which value was built. Each ME Team would,
during a business-planning round, set out the capabilities it sought to build in
their specific area and then go about prosecuting these plans during the year.
These were all virtual teams populated by members of the growing, fee-earning
team at Moorhouse. Each team worked on ME matters in the margins of their
busy lives serving clients, but therein lies another interesting dynamic. Intelligent, ambitious people join professional service companies to be part of the

Figure 2.9 The Moorhouse ME Wheel (showing ME Team leads and team members)

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THE FUNDAMENTAL COMPONENTS OF VALUE

growth journey and to develop their own knowledge and skills across such business domain areas. The culture at Moorhouse was very much this is your firm, so
help us build it and, indeed, the presence of this organising logic soon became
a real recruitment feature for the aspirant new joiner who was motivated by this
dimension of life in the company.
After a couple of years of running ten ME project teams, a large amount of
ground had been covered and some capability aspects that were initially project
outcomes were moving into everyday, operational concerns. For example, once
the Marketing ME Team had successfully recruited a permanent, professional
marketeer and supported her in the process of establishing key marketing processes, its job was partly done. That is, they could ease back from the process of
establishing and running the basic operation (now in the hands of a professional) and focus on supporting her in the ongoing development of the capability.
Organisationally, therefore, ten teams eventually became too many, too overengineered, once these foundations were built. Nonetheless, the principle of
whole-firm involvement in all such key areas of the business remained critical
so we simply reduced the ten teams down to four, consolidating Quadrant teams
(as per the Multiple Enhancers Diagram in Figure .). This construct survived
for the duration of the time it took to take the business to sale and beyond.

Figure 2.10 The Equiteq Growth Wheel

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TOP TIPS

Organising around value elements


You will hear more about Paul Collins during the course of this book
as he served as an invaluable mentor to me through the course of
the Moorhouse case study. He now runs a successful firm called
Equiteq (which specifically focuses on growing and realising equity
value in consulting firms). Pauls levers from his original presentation
sit at the heart of Equiteqs Growth Wheel as detailed below. As an
aside, Equiteqs website is an excellent resource for more on this and
I recommend that you bookmark his site.

You will have noticed, however, from the previous section, that the Moorhouse
ME Wheel does not map directly to Equiteqs levers (as sound as they are); nor
does the guide structure of this series map directly to the ME Team organisation that we settled on at Moorhouse in those early days.
In this series after further experience and consideration on the matter I
have opted for the more granular approach in order to ensure all key aspects are
given due attention. As tempting as it is to consolidate, I would be doing you
a disservice in the process as the devil really is in the detail when it comes to
actually building these capabilities within your firm.
That all said, I strongly suggest that you start thinking now about how you
might go about organising your colleagues along such lines as/when you get to
a scale that such a delineation of responsibilities is relevant. Clearly, you dont
want the complication of managing fourteen such teams but, in the early years,
eight to ten such teams is about right (as there is so much ground to cover).
The important point is that as long as you cover all the multiple enhancing
elements I will present to you in this book you can organise teams to address
such matters by your own thematic bundling. Better still, organise a team session at the appropriate time to discuss this and the optimal carve up within
your organisation. The resultant project team structure is far more likely to be
owned, and accepted, by your colleagues if it is self-shaped.

Typical Multiple Values


Now that we have covered the topic of EBITDA (Earnings) multiples, you probably want to get a feel for the ranges they typically fall within. The graph below
shows some historical data for professional service firms sold in North America
from to :

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Figure 2.11 - Historical multiples for professional services firms sold in N. America (20072011)

As I mentioned previously in the guide, as private companies are generally owner-managed, reported profits tend to be restrained by various expenses that may
be non-recurring under a new owner. This will have been factored into the price
the purchaser paid, but may not be reflected in the profits declared to the public.
The effect of this is that the multiple paid as calculated from the publicly available information is invariably overstated. I recommend, therefore, that you
pay more attention to the second data series in the graph (that I have discounted
back by a sound working assumption as to the difference) for a more
realistic sense of the multiple range you can achieve.

When are you saleable?


Thus far we have discussed the fundamental components of value in a professional services firm. This is, of course, only relevant if you are saleable in the first
place that is, at a stage where you can generate competitive bidding interest
in your firm. I say competitive buyer interest as you are very unlikely to unlock
your true value in the circumstance of a single buyer (perhaps one that has approached you unsolicited). Unless they have a critical strategic need, such a situ-

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ation is unlikely to give you a full negotiating hand. Indeed, the old acquisition
maxim one buyer is no buyer is a really important one to acknowledge, early
on, in your quest for optimal value.
To get the maximum value and the best terms, rather, you are far better off
entering into a deliberate, well-orchestrated competitive situation (supported by
the right professional advisers). The question, therefore, is at what stage is
such an exercise likely to be tenable?
As a guide, I would say the following. A competitive sale exercise is achievable (and affordable) when you have met the following outcomes:
t grown revenues to at least m (m) per annum;
t consistently (previous three years) delivered an EBITDA of plus;
t consistently grown EBITDA, year-on-year, by at least ;
t a rounded portfolio of clients (cf. being a one-client success story);
t a demonstrably accurate sales forecasting capability (premium values go
to those firms with a strong order book e.g. over of business already
booked for forward six months);
t a stable and committed leadership team.
Of course, there are exceptions, but this simple set of targets serves to illustrate
an entry threshold that you should aim to head towards and beyond.

Who is buying?
You may be surprised by the number of different classes of buyer. All I would say
at this stage is keep an open mind. As my case study will reveal I certainly did
not pre-envisage, or indeed seek, the buyer type that Moorhouse attracted (albeit
an excellent mutual arrangement was built). But more of that later.
For now, it is just worth a quick canter through the types of buyers out there
and we will then return to this in more detail in Part (guidess to ).

Your own management (management buy out or MBO)


Your own colleagues most likely a senior cohort buy out the founder(s) and/
or other senior shareholders. This most often requires bank debt funding.

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Trade Buyer
This will typically be a strategic acquisition by another professional services firm
or, indeed, a firm seeking to supplement its existing product-based offering with
a new professional services capability. Regardless, such a firm will clearly be seeking to bolster its own growth ambitions by using your company to do at least
one of the following extend its geographic, service or client reach or, simply,
just to grow its capacity.

Stock Market Flotation


For larger companies, a listing on one of the (small cap) stock exchanges (e.g.
American Stock Exchange in the US or AIM in the UK) is a viable route. This is
going to have more onerous listing conditions than the ones cited in the previous
section not least the level of historical revenues (albeit these vary by exchange).

Investment House
This is primarily the domain of Private Equity (PE) houses albeit some Venture
Capital (VC) houses have also been known, on rarer occasion, to invest in PS
firms. Such deals are fairly clinical, financially motivated decisions with the Investment House looking to make a good future return for its own fund investors
based on your historical trading results.

Additional Value Considerations


We have looked now at all the elements of a companys value that you, as a
directing owner, have real influence over. In summary, you increase your firms
value by growing profit and by embedding the multiple enhancing capabilities
(which make such profit growth sustainable).
There are, however, other factors that will influence any valuation market
premium and buyer synergy.
By market premium, I am referring to the general state of the market. In a
bullish phase of the economy, companies will trade with a premium on average
multiples (sellers market). Conversely, in a recessionary period, with less merger
and acquisition activity, multiples will be depressed against a historical average.
The key point here is to do with the timing of your value realisation point. You
should, clearly, take a perspective on the likely economic cycle you are in before
you set any value realisation time schedule.
By buyer synergy, I am referring to the situation of a trade sale when a buyer
is attracted to a particular aspect of your company (services, geographic reach,
client base, resource skill set) which, when added to their model, unleashes an
exciting, new profit-yielding capability. Think + = logic. The more idio-

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syncratic/rare this matching is, the higher a synergy premium you can command. If the combination really works for the buyer, if it really talks to a strategic growth ambition they have, then the synergy value can be so high as to dwarf
all the other sources of premium value I have mentioned.
At first flush, it may appear that you have minimum control over these latter
two aspects but this is not so. Getting the right market premium is about having
a dynamic, strategic timetable and constantly monitoring the macro/economic
conditions to select your future, sweet spot moment. Similarly, you can improve the chances of a premium buyer-synergy sale by undertaking a thorough
buyer search-and-tell exercise at the start of any competitive sale process. We
will cover this in Guide .
Finally, a key factor you should also consider now is what you intend to do
at such a future point. If you are still very much a driving force behind the company at a point of sale, you will not be able to just walk off into the sunset. To
do so, would have serious implications for the valuation; indeed, it would likely
negate any chance of finding an interested buyer. The usual situation is, rather,
that key leadership members will be locked-in for a (typically one-to-three year)
period (through the incentive of an earn-out arrangement). The only way you,
as an active owner now, can plan for departure-on-exit without any erosion of
value is to essentially design yourself out of all the management processes in the
interim. For any buyer to believe your complete departure will not denude value
they will need to be sure you have had minimal influence on the immediately
previous trading history, or company operation. That is, you have effectively
already retired to shareholder-only status some time prior to the sale. Whilst
such an effective pre-sale extraction certainly makes the growth journey even
more challenging, it is not impossible; but, clearly, if that is your ambition, it
will require very, very careful management.

ACTIVITY
Take some time out to assess the landscape of future, potential
buyers. Look for firms that might have a strategic requirement for the
types of capabilities you are building; that is, where there is future
potential for a buyer-synergy premium. Ask yourself what more you
can do to enrich such a capability-matching yet further. This analysis
will feed in perfectly to the business planning activity we are going
to cover in the next guide.

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TOP TIPS

Tax Planning
This guide has focused on company value; in doing so it lays the
foundation for the rest of the book. In that this is all eventually about
rewarding you, I need to draw your attention to a factor that will
have a significant influence on the personal wealth you, ultimately,
create for yourself and others. Tax Planning. I am no expert in this
field but I do know, with some experiential reinforcement, that you
are well advised to court the expertise of tax experts from an early
stage; for example, as soon as you establish share, or share option,
schemes. Without such advice wired into your overall value-creation
plans, you will, undoubtedly, personally lose more of this value
extraction than you need to. Start searching around for well-referred
tax advisers now.

The Other Values


The word value tends to get overdone to the point of hackneyed exhaustion
in business literature. I may be guilty of it myself in this guide. When taken,
however, in the context of an event when an external buyer and yourself are negotiating terms for the sale of your business value is a very real object indeed.
Such a moment may well be the most significant wealth-creation moment of
your career; one that buys you many personal freedoms beyond, so it is critical
now ideally pre-departure that we do labour this understanding together.
I have spent a whole guide on this topic because I want you to be fixated on
where value truly lies before you even begin the process of building it in to your
company. If it causes you to invest in activities that go to the heart of this and
to avoid the ego-traps and the irrelevant, then it will have achieved its aim. The
remainder of the book will focus on how you actually go about building value
such that you eventually get to a place where you have, at least, the option of
accessing it.
Before I close this guide, I cant skip over the alternative definition of a
value; that is the human/ethical values that sit behind, and determine, your
firms culture. As you will have noted in the Multiple Enhancers section, a
high-performing team is essential for a premium valuation. When all is said and
done and these pretty diagrams and formulas are analysed it all comes down
to a point that is not even captured within them. No buyer is going to place any
value on a loose group of rotating associates who just muster for the client pay

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cheque; rather, they will be looking for real delivery team cohesion, collaboration and a collective loyalty to the firm and its clients. It is, further to this, impossible to build all the other multiple-enhancing capabilities I describe without
such a team ethic in situ in the first place. Getting this buy-in, this extraordinary
psychological contract from your colleagues, only comes about if you build a
values-based culture from the off. I will leave this point there for now; it deserves
necessary expansion in its own guide (Guide ); suffice to say, in final analysis,
the real path to building value starts with having values.

CHECKLIST
F

Review your current reporting system(s). If the feed information


or formatting doesnt give you a balanced view of three main
sources of profit (margin, productivity and leverage) then redesign it.

If you dont already have a good understanding of your industrys


average productivity figure (average fee revenue per staff
member) then research this data. Once done, have you set
yourself a stretch goal in this regard?

Complete an analysis of your likely average engagement team


size (broken down by experience/grade structure) in
preparation for more detailed business planning.

Undertake regular Profit Improvement reviews (you can use the


checklist provided early in the guide). Is the first one in the diary?

Undertake an initial, high-level assessment of future, potential


buyers. Specifically, you are looking for opportunities for buyersynergy premium. Make a note as to what capabilities you
should develop (e.g. service/industry/geographic reach) that
might enhance this premium further.

LINKS TO RESOURCES/TOOLS
Check out the guide 02 Resource Folder on
www.dommoorhouse.com for more resources including an interview
with Paul Collins on the value growth process

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THE FUNDAMENTAL COMPONENTS OF VALUE

AS A MINIMUM
U Understand that a professional service firms valuation is driven
by the buyers expectation of future profit.
U The most common valuation formula is a multiple of profit where
the multiple is based on an assessment of the capabilities within
your business.
U You will increase the value of your business by growing your
profit and building the set of capabilities that can sustain such
growth into the future.
U There are many capability elements to work on but the most
important are an accurate revenue and profit forecasting
capability, differentiated service propositions, your marketing
and selling engine and a high-performing delivery team (which
only exists when the leadership team is exemplar also).
U Profitability is a function of margin x productivity x leverage. You
must measure and manage all three of these profit levers.
U This series of guides is structured on the basis of the multipleenhancing elements. You should give early consideration as to
how to organise project teams (tasked with building capability)
around these themes.
U One buyer is no buyer. You will only ever derive maximum value
from a competitive bidding process. Such an exercise is viable
when you have $8m/5m-plus revenues, demonstrable profit
growth and an accurate sales (and profit) forecasting capability.
U There are four classes of buyer of professional services firms
your own management, trade buyer, stock market flotation and
Investment Houses.

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ENDNOTES
1

The name comes from the DuPont Corporation that started using this formula in the 1920s

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Acknowledgements
Writing a book like building a business is a team sport. In the same way that
I used to feel awkward taking solitary, personal plaudit for Moorhouses successes (recognising, always, how many people had contributed to this), so I feel that
the singular descriptive of author belies the massed efforts of contributors, advisers, reviewers, family and friends who truly keep such a project on its tracks.
To this end, as a newcomer author (and publisher), I am particularly grateful
to the support of my editor, Lynda Watson, and typesetter, James Nunn. They
introduced a complete novice to the nuanced craft of writing a book and showed
commendable patience and professionalism as I blundered my way through the
early stages of this process. In a similar vein, thanks go to Jonny Perl, and his
team at Traffic Digital, for the illustrations that help bring this series to life.
I set off on this book series aiming to produce content that was genuinely
relevant and useful to professional service firm entrepreneurs cf. being a complete vanity project (there may still be shades of the latter). If I have got even
close to achieving this aim, then the many expert contributors and reviewers
deserve fulsome plaudit also. Thus far (in the part complete series), this illustrious group includes: James Appleby (Bluefin Solutions), Pete Austin (Suiko), Paul
Collins (Equiteq), Jon Everett, Nick Fletcher (Vivendi Consulting), Bob Hendicott, Tanya Lightbody (Ingenuity Inspired), Andy Marsh (Suiko), Martin Powell
(Cambridge Market Research), Tim Phillips, Jon Russell (Moorhouse), Lars Tewes (SBR Consulting), Rupert Tobin (100%Cotton) and Paul Wilson (Provelio).
There would not have been any content or story to tell in the first place,
however, had it not been for the simply awesome team that was the firm Moorhouse during my tenure of MD-ship from 2004 to 2011. Leadership is an absolute privilege and pleasure when you discharge it amidst such a talented
group of colleagues. For any pearls of motivation or knowledge I was able to dispense, I received ten-times back in return from all of those I worked with. There
are too many to name in person here but they all know who they are; collectively,
they are the founders of what will, hopefully, be a great firm for many years to
come. To all of them, a heartfelt thank you for supporting me in building such a
tremendous business and for having such immense companionship and humour
en route. It is a very special thing indeed when your primary reflex, on reflection
of a period in your life, is simply to smile.
Finally, a long overdue thank you to my wife and children. Building a team,
a business or a book can too easily result in a single-tracked restriction of ones
overall vision. I have certainly been guilty of such mildly obsessive pursuits. As
such, Roz, Finlay, Claudia and Annika deserve all concluding credit for their
loving tolerance of an imperfect husband, and father, and for their daily demonstration to me of what is truly valuable in life.

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to
entrepreneur
is to
dare...

e,
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ti
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practical, in is on the
based as it rience of
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on,
giles johrn,scil
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That said, successful entrepreneurs also


have a very clear game plan. In this unique collection of Guides,
Dom Moorhouse explains how to go about building a sustainable,
profitable and, ultimately, valuable professional service company.
Written specifically for business leaders who seek to methodically grow
their service companies, the Guides provide a trove of insights, tips,
checklists, ideas and case studies that will significantly de-risk the process
of owner wealth creation. If you want to arrive at a point where your
business has material, life-changing value, and you want to get there in
short order, then the Five-Year Entrepreneur series is for you.

Dom h
condensed as
of critical e a wealth
xperience,
anecdotes
a
n
d
advice into
a really pra
c
guides rele tical, concise set of
va
profession nt for any aspiring
al
owner or fr service business
ankly thos
eo
who have
been doing f us
this
for a few y
ears!

andy
managingmdarsh,
ir
suiko ltdector,

dom
moorhouse,
the founder of Moorhouse, a leading
UK professional services business,
led the company from singleton
start-up to a c. $30m (20m) sale in
less than five years. In these unique
Guides, that give an unprecedented
and detailed how to analysis,
he explains how such a journeys
reward is within the reach of all
who approach their entrepreneurial
ambition with a deliberate,
structured intent.

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the guide i wish id had to building and selling a professional service business.