By definition a service business does just that. It provides a service. It does not manufacture, distribute or wholesale a product. The types of business we are talking about here include Legal Practices, Accounting Practices, Coaching and Advisory Businesses, businesses for example that service equipment, cars or aircraft. Businesses that sell any service whether it be IT, Educational, Health, Aged Care, Sporting or Recreational, Transport, Mining, Property, Beauty, Handyman and Gardening, Cleaning, etc.
Growth in the Services Sector over the past 50 years or so has offered the challenge to valuers to come up with a way of successfully valuing these businesses, where they are mostly made up of goodwill and other intangible assets.
Things to look at when valuing a service business are similar to the things you want to look at if you were buying or selling one. Tangible assets such as stock or equipment become less relevant, while intangibles such as trademarks and other intellectual property, databases, client lists, ways of doing business and software become more relevant and important.
In determining saleability, a valuer is looking to a number of things. Maintainability and transferability are chief among these things.
One thing that stands out more than anything in this discussion is how the world of business has changed in the last 30 years. Hardly ever do you see a business being transferred from father to son to grandson. With the birth of the Internet and the growth of the services sector it is not unusual to see a business from start-up grow rapidly to be the leader in the category and then be replaced at the top by the “new kid on the block” who suddenly assumes top position. This can be seen with the growth of MySpace which almost overnight was replaced by Facebook – who knows who will be King in three years. Similarly the early search engines, like Yahoo and Altavista were suddenly no longer heard of in the same breath as Google who seemed to come from nowhere.
In service, the barriers to entry are lower and foreseeability of future income and the certainty of that income becomes problematic. To overcome this problem position your business and create the infrastructure that will lead others to accept and believe your income streams are more foreseeable and certain. If buyers can rely, risk is reduced and value increased.
Since a business in the service sector is quite often based on relationships that the owner has built up over years, the transfer of these relationships becomes the key issue for the owner to deal with when selling or valuing his or her business. Here we see the importance of systems, reducing reliance on the owner and key staff, and other measures to increase transferability of these mainly intangible assets.
Things an owner of a service business can do to increase maintainability and transferability of the income streams.
- Grow the business so that it is not so reliant on the owner or owners.
- Build systems so that the way the business is run is more understandable and logical for a buyer.
- Standardise your offering so that both customers and employees understand what it is you are selling and get used to it. This eliminates randomness, helps your employees and educates your customer.
- Create the environment within your business where you can take three months off and you won’t see the business suffer in your absence.
- In the marketing space continue to build your uniqueness so that you can be easily distinguished from your competition. “Me Too” companies do not attract the value and are difficult to sell.
- Build a brand. Brand is the strongest of all intangible drivers within a business. Brand equates to what you say to your customers when they do business with you. It expresses your values and reaches out to the values of your customer. It sets good companies apart from great companies and will help you build a value of your service business.
The points mentioned above are particularly relevant to service businesses although they also apply to non-service businesses or partly service businesses.
If you are selling a service business and it is not well prepared for sale, you may have to take other measures to preserve business value. You may have to sell the business based on performance conditions, where your final purchase price could be reduced (or increased) by virtue of how the business performs without you there. Also you could offer vendor finance to a purchaser, secured only against the business and its assets. If the business fails you won’t get paid. Thirdly you may have to stay on in the business to assist in the handover of the goodwill. These measures may preserve or boost value however they also expose you to risk that you may not want to undertake.