Three Key Factors That Make a Firm a Strong Acquisition and a Valuable Asset
What makes a firm appealing to buyers and a rewarding business to own? Three main factors stand out:
- Strong financial health
- A well-established, positive culture
- Minimal reliance on the owner
Here’s why these aspects are crucial:
1. Financial Stability
A firm’s profitability is a top priority for buyers, yet the definition of “profitable” can vary. At Cathcap, the “Rule of Thirds” serves as a guideline:
- One-third of revenue goes to employees doing the work.
- One-third covers overhead expenses, including marketing.
- One-third is profit.
However, profit margins can fluctuate based on the firm’s billing model:
- Low-risk firms (hourly billing) tend to maintain a 30% profit margin since revenue is directly tied to billable hours.
- High-risk firms (contingency-based) aim for a 50% margin due to the uncertainty of when and how much they will be paid.
- Moderate-risk firms (flat-fee billing) fall somewhere between 30% and 50%, as their revenue is fixed per case regardless of the effort required.
Importantly, profit isn’t solely for the owner—it also covers taxes and reinvestment for future growth. When assessing a firm’s value, Seller’s Discretionary Earnings (SDE)—a combination of salary, owner benefits, and profit—is the best metric. Most firms sell for 2.5 to 4 times their SDE, with higher SDE equating to a higher firm valuation.
2. Strong Company CultureA firm’s culture is often more important than its strategy. A team that understands and executes the firm’s vision efficiently prevents constant management fires and enhances overall stability. To cultivate a strong culture, firms should:
- Have a clear vision and structured reporting system.
- Assign roles where employees can thrive.
- Establish key performance metrics for accountability.
- Use core values to guide hiring, firing, and promotions.
- Implement robust onboarding and training programs.
- Offer career development plans for employees.
A well-defined culture ensures that team members work cohesively, goals are consistently met, and workplace drama remains minimal.
3. Reduced Dependence on the Owner
A firm’s long-term viability improves when it operates smoothly without relying heavily on the owner. Buyers look for firms that can run independently, increasing their attractiveness. Steps to reduce owner dependency include:
- Ensuring marketing isn’t centered around the owner’s personal brand.
- Delegating sales responsibilities beyond the owner.
- Documenting key operational processes.
- Strategically adjusting the firm’s capacity to meet workload demands.
- Leveraging technology for tracking and efficiency.
By gradually stepping back from daily operations, owners increase their firm’s value, making it a seamless transition for a new buyer.
The Ideal Firm for Acquisition
A desirable firm generates 30%-50% in profit, fosters a strong workplace culture, and operates efficiently without the owner’s constant involvement. With these elements in place, a firm becomes a prime acquisition target—and a business worth keeping.
If your firm doesn’t yet meet these criteria, now is the time to start refining its structure and strategy.
