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Firm Valuation

  • 1.  Firm Valuation

    Posted 09-01-2017 10:13
    I'm looking for advice on firm valuation.  I've attended several 'ownership transition' seminars, but they are all focused on large firms with large revenues (we are an office of five with gross revenues well under $500K).  Are there any simple ways to determine firm value?  Or perhaps a way to estimate value to decide whether a more costly valuation process is warranted?  Thanks

    Scott Rappe AIA, LEED AP
    Kuklinski + Rappe Architects PC
    Chicago IL

  • 2.  RE: Firm Valuation

    Posted 09-04-2017 17:44
    I've been through a few valuations. What I've found (your results may vary!):

    -one formula is 4(+/-) x EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Can vary based on factors listed below.

    -a more typical method is to use a factor x annual gross fee (usually minus consultants) billing. The average factor is 1.0, but it can vary widely, i.e. from .30 to 2.0. The factor value is determined by the likelihood of the fee stream continuing after a sale. So as a theoretical example, a firm with a well-know individual leading it, maybe with non-transferable social connections, will likely have a revenue decline after the sale and departure of the principal, therefore a lower multiplier. Conversely, an "acronym" firm that does government or specialty work (that is not
    dependent on an individual) might continue to bill consistently after a sale, hence a higher multiplier.

    All of the above assumes the seller leaves at some point. With small firms in particular you need to start the sale process early as the buyers (assuming they are employees) likely won't be able to borrow for the purchase, so it will have to be funded through profits, bonuses, or salary. And that usually takes a long time.

    Best of luck.

    Gregory Ibanez FAIA
    Ibanez Shaw Architecture LLC
    Fort Worth TX

  • 3.  RE: Firm Valuation

    Posted 09-04-2017 17:54
    Googling "architecture firm value" will get you to some reading material.

    Zweig Group has a book they will sell you, but you could start with reading this
    blog post from them, and trying out the calculator there that's free.

    If you're going to use this as part of an ownership transition effort, I suggest you do the calculation on a fairly regular basis, perhaps even quarterly; even if you're not selling, or selling shares internally, it's good to keep track of where you are.

    best regards,
    Joel Niemi
    - Architect

  • 4.  RE: Firm Valuation

    Posted 09-04-2017 18:21

    Scott – we frequently develop abbreviated valuations for firms under 15 people.  The metrics differ less by size than by market sectors, although there is less liquidity in smaller firms and therefore often lower metrics.  Regardless of the valuation, in the end the price needs to align expectations of the sellers with the attractiveness and affordability of the offer to the buyers.  And, oftentimes, it is as much about the terms than the actual price.

    There are many options and considerations in terms of structuring a framework.  A few:

    • What assets will be included in the purchase?
    • Will the purchase be phased?
    • Will the purchase be financed by the firm and/or the individual seller(s)?
    • What are the terms of the buy/sell agreement?
    • Is there a vesting schedule?
    • Are incoming owners required to purchase a minimum amount of shares over a given time period?
    • Is there a "look-back" adjustment should the firm significantly increase in value or be sold?

    Since most incoming owners do not have the cash readily available to purchase a significant portion of a profitable firm, it is important to look at annual cash flows for 1) the incoming owner(s), 2) the outgoing owner(s), and 3) the firm.  Oftentimes, by a combination of allocating specific assets such as a portion of the firm's cash and AR, and by obligating some deferred compensation and/or future distributions to current owners, a firm can strike the right balance.

    The AIA Architects Handbook of Professional Practice has a good primer.  Disclosure:  I authored the section on ownership transitions, but I do not receive any of the revenue should you decide to purchase the handbook or the chapter that contains information on transition planning.

    Hope this helps.


    Michael Strogoff, FAIA

    Strogoff Consulting, Inc.

    p: 415.383.7011

    c: 415.717.2755



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  • 5.  RE: Firm Valuation

    Posted 09-05-2017 17:11
    Thanks Scott of bring this up. I recently looked of rate same info on line and from the AIA.

    There is nothing unless you want to invest in a book or a course.

    I am a one man firm and I wanted to evaluate to sell my firm.

    I have been an AIA member for 48 years. You would think they could come up with a little help in this

    subject when so many of their old members are approaching that time to sell or just close the office.

    Thanks. Nelson