Are Consulting Firms… Sellable??
Ever heard something along the lines of the following statement?
“We all know information businesses aren’t sellable, they’re just cash grabs.”
This is false.
You can understand marketing and be dangerous — but, if you don’t understand business, you’ll struggle to build wealth. And you’ll never be well rounded enough to control the elements.
An information business can be sold but it cannot (or should not) be called an “information business.” Or run like an information business.
Follow the logic here.
If you are listening and paying attention – you no longer own an information business. You own a TRAINING COMPANY.
The reason you own a training company is because it will begin converting your skill / IP / abilities / talents into systems and curriculum — rather than you just getting on the phone every day.
You can’t sell something that isn’t decentralized properly away from one person. And it comes down to a word called “concentration.” More specifically, “Concentration Risk.”
Buyers (both cash flow buyers & strategic buyers) are terrified of concentration risk. The only way you can sell something with high concentration risk is severe discounts and earn-outs… neither one of these do we have time to cover.
The point is: How can you begin setting yourself up NOW for a good exit LATER?
It starts with understanding that there are 3 kinds of firms.
The 3 Kinds of Firms
If you don’t believe consulting businesses are sellable, you should spend some time looking at Greg Alexander.
He built a sales agency, sold it for an insane multiple, and wrote a book about it. The book is pretty good, we would recommend it if you’re certain you want to sell or exit at some point.
In the book he mentions a piece of intellectual property that we would like to share — but you should know this concept came from Greg, not us.
Greg says there are 3 kinds of firms:
- Intellect
- Wisdom
- Method
If you own an intellect firm, clients hire you to solve difficult, “one-of-a-kind” problems.
Your brain is highly involved & you’re using something that’s very hard to train or reproduce: your genius.
These firms have lower multiples and are mostly built around a founder or group of founders.
If you own a wisdom firm, clients hire you because you’re “been there, done that.” In our opinion, this is just a derivative of intellect… because they’re still sending you money because of your unique experience that is hard to duplicate or reproduce.
If you own a method firm, clients hire you because of your unique methodology (processes, hands on labor, support).
Consulting falls into the first two categories. If you get really good, though, you begin to walk across the bridge into “training company” territory.
Here is the key differentiator:
Experience produces wisdom.
Examined, rehearsed, & codified wisdom produces curriculum…
If you can take what you have been through, flip them into repeatable frameworks, you can TEACH it, DUPLICATE it, REPRODUCE it…
And eventually, reproduce yourself.
If you have a training company with the following figures:
- 100,000 customers / year buying books, products, courses & materials
- 1,000 clients / year getting “hands on” support, community, and in-person access
- 100 clients / year getting access to our “service business suite,” getting work, labor & service performed for them
- 10 clients / year converting into equity partners
Exclude the 10 clients at the very bottom… just the top 3 is probably north of ~$25M/year in annuals. If there is an org chart, SOPs, repeatable systems inside every department… and (IMPORTANT) diversification away from one singular provider or founder…
At a 30% margin ($7.5M) and a 6x multiple this is a $45M exit. At a 9x multiple, $67M. At a 10x, $75M. You get the point…
When Does it Make Sense to Sell?
The question you must ask, every time, is this: do I enjoy the business? Do I enjoy the leverage?
If you take $45M and plug it into the markets, conservatively assuming an 8% yield which is actually quite decent… you pull $3,600,000 a year.
Which is definitively less than $7.5M.
If you sell for $67M and put it into markets at 8% you pull $5.3M which is also less than $7.5M. So here’s the conundrum: you almost always make more by holding than you do by selling.
Thing should be built with the option to sell, but in a LOT of cases, if you love something you should keep it and make it awesome.
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