by Michael Strogoff, AIA
Strogoff Consulting

Want to know what your firm is worth? There are plenty of good resources about how to value architecture, engineering, or design firms, including several consulting firms that specialize in ownership transitions. These consultants use a handful of factors to develop a fair market value: adjusted net worth (book value), weighted net income, weighted net fees, projected fees, number of professional staff, etc. These factors produce a range of a firm’s value. For example, some consultants place a firm’s value between 1–1.5 times adjusted net worth for an internal transition, or between 2–3 times for an external sale. Other consultants place a firm’s value between 3–5 times weighted net income. The mystery is how to narrow these ranges to gain a more precise indication of the value of your firm.

Few consultants are willing to pinpoint a firm’s value because doing so entails highly subjective judgments, in-depth understanding of that firm’s strengths and weaknesses, knowledge about how that firm compares to its competitors, and ability to forecast how that firm will likely fare in the future.

To develop a more precise fair market value for your firm once you have a valuation range, rank your firm against the criteria below. If you rank extremely high across the board, you can safely use the high end of the valuation range. Likewise, if your firm is struggling and ranks low against these criteria, use the lower end of the range.

Ability to obtain new business and deliver it profitably. The quantitative factors commonly used to value a firm assume that a firm’s recent history is a good indicator of its future. While true to some degree, a firm’s ability to garner future work and generate future profits is also influenced by qualitative factors such as its reputation in the marketplace and ability to differentiate itself from competitors, the quality and depth of its portfolio, its contacts and resources, its current and potential market penetration, the skills and experience of its key people, the broadness of its client base and geographic reach, its history of repeat clients, its special areas of expertise, and its delivery methods and efficiencies.

Steady growth and healthy backlog of work. Firms blessed with recent and steady growth and a healthy backlog of work (usually six months or more) command a higher value than firms on a sideways or downward trajectory and without a backlog to keep its staff fully billable. When looking at backlog, the amount of work under contract with authorizations to proceed is more valuable than work not yet under contract or awaiting authorization.

Resources, assets, and cash flow. Firms with a solid infrastructure of equipment and software, good cash flow, and access to capital have longer staying power and are better positioned to respond to new opportunities and weather market cycles. On the other hand, firms that are undercapitalized are more vulnerable and, therefore, worth less.

Strong design, technical, and management skills. The quality of a firm’s work, the amount of fees that the firm can negotiate, and its ability to manage its risks are all important components of its value and are directly influenced by the level of design, technical, and management skills of its staff. Indications of strong technical, design, and management skills include evaluations of a firm’s QA and risk management programs, professional training programs, litigation and claims history, awards, professional recognition, and management resources and experience.

Appropriate lengths of time current owners are able and willing to stay during a transition. The value of professional service firms is inextricably linked to their leaders. Firms with well-planned transition plans that ensure effective, uninterrupted leadership are worth more than firms whose future leadership structure is unknown. On the other hand, owners who remain beyond their productive years (or at the expense of the development of incoming owners) lower the value of a firm.

Depth of key staff, including next generation of owners in place. Firms with a wide range of staff skills and depth command higher prices than firms dependent on a handful of leaders and senior staff. Likewise, firms with future owners on board and committed to the firm’s future are better positioned to expand and prosper and, therefore, are worth more.

Amount and quality of intellectual capital. Firms with the special expertise, resources, and tools to give them a strong marketing edge over their competitors; deliver higher quality services; and/or produce quality work more efficiently will command a higher value than firms lacking the intellectual capital that distinguishes them or allows them to deliver higher quality or more efficient projects.

Of course, as with all business transactions, the “fair market value” is eventually determined by discussions between a willing buyer and a willing seller and is subject to the actual terms of the ownership transfer. However, using the above criteria can help guide these discussions and provide a rational way of agreeing upon the true value of an architecture firm.

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