The majority of businesses in America today started out as service companies.
If you want to own a web design firm, you don’t need a lot of money, just a technical knack. Enterprising professionals who know how to get the media’s attention can start their own pubic relations firms without much more than a mobile phone. No capital required.
But if you want to build a valuable company – one you can sell – you’ll want to stop presenting yourself as a service firm. Consultancies are not usually valuable businesses, because acquirers generally view them as a collection of people who peddle their time on a hamster wheel. The typical way to sell a consultancy is for the consultants themselves to trade their equity for a job, in the form of an earn-out that may or may not have an upside.
If you want to build a valuable company consider re-positioning your business out of the ‘consultancy’ box. Depending on your business, you may need to change your business model and ‘productize’ your service. One of the first things to do is to stop using consulting company terminology and replace it with the terminology of a valuable business:
Defining your company as a ‘consultancy’ will announce to the market you are a collection of people who have banded together around an area of expertise. Consultancies rarely get acquired, and when they do, it is usually with an earn-out. Replace ‘consultancy’ with ‘business’ or ‘company’.
An engagement is something that happens before two people get married; therefore, using the word in a business context reinforces the people-dependent nature of your company. Replace the word ‘engagement’ with ‘contract’, and you’ll sound a lot more like a business with some lasting value.
A deck is a place to have a glass of wine. It’s not a word to use to describe a PowerPoint presentation unless you want to look like a ‘consultancy’.
Instead of describing yourself using the vague term ‘consultant’, describe what you consult on. If you are a search engine optimization consultant, who has developed a methodology for improving a website’s natural search performance, say you ‘run an SEO company’ or ‘help companies improve their ranking on search engines, such as Google’.
Consultants promise ‘deliverables’. The rest of the world guarantees the features and benefits of their product or service.
Associate, engagement manager, partner
If you refer to your employees with the telltale labels of a consultancy, consider replacing ‘associate’, ‘engagement manager’ and ‘partner’ with titles like ‘manager’,” ‘director’ and ‘vice-president’, and you’ll reduce the chance of your customers expecting a bill calculated at 10-minute increments.
The word ‘client’ implies a sense of hierarchy in which service providers serve at the pleasure of their client. Companies with ‘clients’ are usually prepared to do just about anything to serve their clients’ needs, which sounds great to clients, but also telegraphs to outsiders that you customize your work to a point where you have no leverage or scalability in your business model. Would your ‘clients’ really care if you started referring to them as ‘customers’?
It’s easy to get stuck in a low-growth consulting company. ‘Clients’ expect to deal with a ‘partner’ on their ‘engagements’, so the business stalls when the partners run out of time to sell. If a company ever decides it wants to buy your consultancy, acquirers will know they have to tie up the partners on an earn-out, to transfer any of the value. When it comes to the value of your business, optics matter and the first step in avoiding the consulting company valuation discount is to stop using the lingo.
Marsha Golgart CMEA, CEPA, ISBA – Nationwide Valuations – (303) 484-3033 (303) 374-6771 (fax)