Intangible Assets: Could They Be the Secret Sauce in a Sale of Your Professional Service Firm?

The Collective 54 members at the Founders Summit last October completed an exercise that forced us to summarize our work succinctly to uninformed audiences. Frankly, most of us seemed to struggle mightily with completing the C54 “haiku”:

We deliver [outcome]

for [ICP]

by solving [problem]

with [solution]

I’ve thought about this activity a lot since that day, discovering that it exposed one of my personal bottlenecks as Founder – turning our market strengths into sellable assets.

HOW WE VALUE OUR OWN FIRMS

When we are CEOs, our best attributes are literally baked into our professional DNA – after we receive the client call, we leap to define the best solution to their problem. The C54 haiku never enters our minds, because we know what to do about the client’s problem and how to do it.

But as Founders, the challenge of defining “the what” and “the how” becomes critical to unleashing the full value of our firms. When we hear from C54 that a professional service firm with [fill in blank] million in revenue could be worth 6x-8x EBITDA, most of us dream that we will actually hit 8x-12x, because we know we are better than any of our competitors.

Here is the reality: that secret sauce that we all have – our unique ability to address client problems – does not easily emerge from an outsider looking at EBITDA.  We know it is in there … someplace in our P&L, since as CEOs we can see how this intangible skill is driving our financial success.

But for potential buyers, may not be easily convinced that the intangible values we see are actually there. We all know the items that rise to the top for them:

• Gross margin
• Growth
• Repeatable revenue
• People
• Processes
• Client list
• Intellectual property

But ask any C54 member trying to acquire firms whether a target has tried too hard for a price based on a set of intangibles that they can’t really explain or value.  I predict the answer is yes. It doesn’t need to be.

TURNING OUR INTANGIBLE ASEETS INTO REAL VALUE

I am not an expert in how to sell a firm. But I have discovered that maximizing the value of  our intangible assets is critical to my eventual sale. Look at my firm’s version of the C54 exercise:

We deliver lower risk and more successful results

for public-facing businesses and agencies

by overcoming the barriers created by competitors and interested parties

with superior and disciplined strategic and communications services.

If we did annual rankings of C54 Top 25 scalable firms, Rapp Strategies would struggle to be listed under “Also Receiving Votes.”  We can scale some of our services, but much of what we do is very client- and problem-specific.

As a result, if I am going to receive maximum value for my sale, I need to be diligent about how I transfer the intangibles that set our firm apart. The intangibles must exist after I depart, and their value must emerge as buyers dig deeply into how the firm operates:

Brand. Our self-designed expression of value to customers and prospects. Unfortunately, in an effort to preserve clients when my majority partner, I chose to name the firm after me. While our brand values are transferred internally through our culture, the brand expression may still need some work before a sale.

Expertise. This includes the body of knowledge that we have accumulated over four decades, and the unique ways that knowledge helps clients accept their challenges and use my firm to address them. Transferring this asset requires me to have a high level of trust and transparency with my employees, always risking that someday they take the expertise to a different firm.

Reputation. The most critical intangible asset. What the market thinks of us – including literally ANYONE who has a chance to learn about the firm – is perhaps the most important part of our marketing and growth strategy. We are aware that opinions formed might not be related to the work we do, so we take care to act professionally as we step into politically contentious issues.

Partnerships. Beyond our employees and regular collaborators, this includes individuals and firms that know us well and work collaboratively to share advice, open doors or co-contract with clients. When others believe we add value to the work they are trying to do, it enhances the first three intangibles.

Shared Relationships. Engagement of other senior leaders in initial client conversations and the ongoing assessment of client successes not only supports their development, but also builds confidence in your clients that the relationship can continue after the Founder leaves.

ARE INTANGIBLE ASSETS IMPORTANT IN YOUR SALES PRICE?

It is likely that each of us has spent time leveraging these intangible assets as strengths. In my firm and perhaps yours, these assets will also be part of executing a successful exit strategy.

Wondering whether you may have more dependence on intangible assets than you realize?  Ask yourself five questions:

1. Are your clients willingly paying more for unique solutions?
2. Are referrals regularly driving your new client work?
3. Are the personal relationships with key clients as important to retention as the quality of your firm’s work?
4. Do long-standing clients naturally default to trying to work directly with you when planning for new projects?
5. Do clients explain what you do more easily than what your firm does?

Answering yes to all five questions has made me happy as a CEO, as the result has been enhanced revenue. But as I transition to being a Founder, and through the knowledge gained in Collective 54, I now see how each answer can also be a threat to a more successful sale.

I need to be proactive by managing the successful transfer of intangible assets to my future leaders.