Tuesday, February 18, 2014

If The Most Important Factor In Firm Valuation Isn't Growth Or Profit – What Is It?

By Kate Allen, P.E.

Whether a firm is being valued for internal transition or for external sale, two key drivers of value are and will always be:  growth and profit (earnings).  But even more important is CONSISTENCY!  Year after year growth in profit and revenue is critical to maximizing the value of your firm.

Which of the following firms is a better investment?
  • FIRM A reporting 23%+ profit, 14%+ staff growth, and 26% revenue growth, OR
  • FIRM B with 11%+ profit, less than 3% staff growth, and 8% revenue growth

FIRM A is a compilation of the median performance of firms included in PSMJ’s 2013 Circle of Excellence, and FIRM B is a compilation of the median performance of all firms that participated in PSMJ’s annual Financial Performance Survey for 2013.

 At first glance, one might assume that Firm A is the best choice.  However, either of these firms could be a good investment IF they sustain or improve their business performance year over year, demonstrating they’ve developed a successful and sustainable business!

Top firms tend to benchmark their progress – they know where they are and where they want to go and they monitor their results consistently.  There’s truth to the old adage: “what gets watched (measured) gets done” – use this to your advantage to drive year over year results and continuously improve your firm’s value!

Kate Allen, P.E., is PSMJ’s Director of A/E/C Industry Surveys.  She can be reached at kallen@psmj.com.

No comments:

Follow @PSMJ_Resources