You yourself are why your services business is worth nothing

Categorized as Leadership

A 100% services business is only worth guaranteed contracts and the residual $ Value of the contracts… plus some additional value for the pipeline/forecasted business plus goodwill for brand name.

I tend to evaluate a few businesses per quarter to acquire them. So, if I buy another services company, I would look at:

1. How much guaranteed revenues they have for x months/years and give them a multiple of that. So if that company has a 1 yr contract for $1MM, with an option to renew… I could give them 1.5MM, effectively, buying 1.5 years of their revenues.

BUT I would tie the payments to the principal being in the business until that value is obtained.. at salary and payouts tied to revenues recognized.

2. Then I would look at their forecast.. let’s say their pipeline of new business is $1MM and their average close ratio is 25%, means that they’re guaranteed another 250k of new business. I would give them 1.2x of that, tied to the business actually closing.

3. Then I would look at their brand name for goodwill purposes.. in other words, how good is their lead generation engine. I’d assign a $ value to that.

Do this math for your own business. Let’s say that, as of now, you have visibility into only $500k guaranteed $s over the next 12 months.

Like many services businesses, it probably has $0 in pipeline for new business.

Like many small services businesses, it probably has 0 in brand name recognition / value.

Would YOU pay a whole lot for YOUR own LLC at this moment?

Would YOU pay an outright cash payment upfront? For most small businesses , the whole business is intimately tied to the principal – YOU.