Valuation multiples for professional service firms vary depending on the industry/sector. For example, analytics companies have a higher revenue multiple than recruiting/staffing.
From a data set of ~90 professional services companies, the median revenue multiple for professional services firms is 1.2x and the median EBITDA multiple is ~12x.
Gross Margin For Professional Services Firms
Gross margin is an important metric for professional services firms, because it’s a reflection of how much the company is directly selling and profiting from clients.
The revenue is the rate that the services are charged at and the costs are the salaries paid to the employees.
Professional services firms in industries that require more specialized skills can demand a higher charge rate to the clients, so their gross margin is typically higher than more general professional services skills.
For example, in the data set analyzed, analytics companies had an average gross margin of 54% and science companies had an average gross margin of 60%, both of which are higher than the overall average of all the companies, which was 43%.
Gross margin is a good indicator of whether a professional services firm should and would have a higher valuation multiple.
Valuation Multiples For Professional Services Firms By Industry
Similar to what we found with gross margins being higher for professional services firms with more specialized skills and knowledge, this trend is also found with valuation multiples.
This makes sense since valuation is the price tag of a firm, and if the firm has higher margins, then the price tag of the company would be higher.
Analytics companies had the highest revenue multiples with an average of ~8x. But what’s interesting is that the average EBITDA multiple is not the highest.
An explanation could be that analytics companies leverage an analytics platform, so below the gross margin line, there might be higher operating cost like software licenses and software development costs that eat into the EBITDA margin.
(By the way, this is a key lesson to not just take the numbers at face value, but think about narratives that fit the company’s performance. If you’re interested in this, you can read more about it in the book, Narrative and Numbers.
Another interesting analysis is that companies that require more specialized skills and knowledge and training to perform the professional services ranked higher in terms of the valuation multiples – Analytics, Engineering, Science, Legal, etc.
(Ahem, I’m a little hurt that Financial and Consulting have lower valuation multiples, since this makes me question whether the field I’m in is not specialized enough! Jokes aside, this is interesting data that is reflective of competition and margins and a myriad of other factors within the industry.)
Data Set of ~90 Professional Services Firms Used in the Analysis
The following is a list of the ~90 companies used in the analysis. The data set contains public companies that are professional services in various industries in the US, Canada, and the UK.
|Professional Services Firms|
|Stantec Inc. (TSX:STN)|
|Morneau Shepell Inc. (TSX:MSI)|
|IBI Group Inc. (TSX:IBG)|
|People Corporation (TSXV:PEO)|
|RELX PLC (LSE:REL)|
|DLA Piper International LLP|
|Intertek Group plc (LSE:ITRK)|
|WS Atkins International Limited|
|Towers Watson Limited|
|PageGroup plc (LSE:PAGE)|
|Hays plc (LSE:HAS)|
|RWS Holdings plc (AIM:RWS)|
|Mott Macdonald Group Limited|
|SThree plc (LSE:STEM)|
|AlixPartners UK LLP|
|Robert Walters plc (LSE:RWA)|
|Gateley (Holdings) Plc (AIM:GTLY)|
|GlobalData Plc (AIM:DATA)|
|DWF Group plc (LSE:DWF)|
|The SimplyBiz Group plc (AIM:SBIZ)|
|Lightspeed Research Ltd.|
|Capital Economics Ltd.|
|Alpha Financial Markets Consulting plc (AIM:AFM)|
|NOP Research Group|
|Mind Gym plc (AIM:MIND)|
|Johnston Carmichael LLP|
|K3 Capital Group PLC (AIM:K3C)|
|The Ince Group plc (AIM:INCE)|
|RBG Holdings plc (AIM:RBGP)|
|Wilmington plc (LSE:WIL)|
|Methods Consulting Limited|
|Keystone Law Group plc (AIM:KEYS)|
|SMART Modular Technologies (Europe) Limited|
|Saville Assessment Limited|
|John Thompson & Partners LLP|
|Tekcapital plc (AIM:TEK)|
|GFT Financial Ltd.|
|Honda R&D Europe (U.K.) Ltd.|
|Knights Group Holdings plc (AIM:KGH)|
|British Ceramic Research Ltd|
|BMT Nigel Gee Limited|
|AXA Assistance (UK) Limited|
|National Milk Records plc|
|RTC Group plc (AIM:RTC)|
|Begbies Traynor Group plc (AIM:BEG)|
|Levitt Bernstein Associates Ltd.|
|Aukett Swanke Group Plc (AIM:AUK)|
|BMT Reliability Consultants Ltd|
|Manpowergroup UK Limited|
|Hydrogen Group Plc|
|Wise Employment (Swindon) Limited|
|Aquila Services Group plc (LSE:AQSG)|
|Development Initiatives Poverty Research Ltd|
|Lane Clark & Peacock LLP|
|Verisk Analytics, Inc. (NasdaqGS:VRSK)|
|Equifax Inc. (NYSE:EFX)|
|Robert Half International Inc. (NYSE:RHI)|
|TriNet Group, Inc. (NYSE:TNET)|
|CoStar Group, Inc. (NasdaqGS:CSGP)|
|CoreLogic, Inc. (NYSE:CLGX)|
|ASGN Incorporated (NYSE:ASGN)|
|FTI Consulting, Inc. (NYSE:FCN)|
|Insperity, Inc. (NYSE:NSP)|
|Navigant Consulting, Inc.|
|ManpowerGroup Inc. (NYSE:MAN)|
|Exponent, Inc. (NasdaqGS:EXPO)|
|CBIZ, Inc. (NYSE:CBZ)|
|ICF International, Inc. (NasdaqGS:ICFI)|
|Kforce Inc. (NasdaqGS:KFRC)|
|Barrett Business Services, Inc. (NasdaqGS:BBSI)|
|Korn Ferry (NYSE:KFY)|
|Resources Connection, Inc. (NasdaqGS:RGP)|
|CRA International, Inc. (NasdaqGS:CRAI)|
|Forrester Research, Inc. (NasdaqGS:FORR)|
|Mastech Digital, Inc. (AMEX:MHH)|
|GP Strategies Corporation (NYSE:GPX)|
|DLH Holdings Corp. (NasdaqCM:DLHC)|
|Hill International, Inc. (NYSE:HIL)|
|Whitehouse Analytical Laboratories, LLC|
|BG Staffing, Inc. (NYSE:BGSF)|
|Command Center, Inc.|
|Where Food Comes From, Inc. (OTCPK:WFCF)|
Englewood Lab, Inc. (KOSDAQ:A950140)