Service business valuation: what is left once the owner walks out
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Every figure here comes from the figures you enter and the method stated beside it: your document count, your own hourly worth, your expected price. This site publishes no valuation, no tax position and no legal opinion; what a clause means for your deal is your solicitor's and your accountant's.
A service business has almost no assets and all of its value in relationships, people and repeatable work. That makes the valuation question unusually simple to state and unusually hard to answer: how much of the earnings survive the owner leaving. Everything a buyer does in diligence on a consultancy, an engineering firm or an agency is an attempt to answer that one question from evidence rather than from assurance. This page is about what that evidence looks like. It does not value your business.
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Consulting business valuation, and the owner dependence discount
Where the clients bought the owner, there is little to sell and everybody in the room knows it. Where they bought a team, a method and a brand, there is a business. A buyer measures this rather than asking about it: revenue by client and who originated it, who delivers it, how many engagements the owner has not personally touched, and what happened to the accounts the owner stepped back from. A consultancy that can show two years of work won and delivered without the founder is a different asset from one that cannot.
Valuation of service business earnings, normalised properly
The earnings a multiple is applied to are not the profit on the accounts. They are the profit after the owner's own compensation is set at what it would cost to replace them, which for a working owner in a service firm is a large number and is where most of the argument lands. Add back one off costs and personal items, then subtract the real cost of the role the owner performs. A valuation of a service business that skips the second half is flattering and will not survive diligence.
Engineering firm valuation and how to value an architecture firm
Professional practices carry two extra items. Licensure and who holds it, because the work may only be signed by somebody qualified and a buyer needs to know who that will be after completion. And professional liability tail cover on work already delivered, which someone has to pay for and which is usually settled late and badly. Backlog matters here more than in most services: contracted work not yet performed is the closest thing these firms have to recurring revenue.
How to value a professional services business from what is on file
Revenue by client for three years with the originator and the deliverer named. Contracted backlog with dates. Utilization and realisation by person. Staff tenure and the notice periods in their contracts. Licenses and who holds them. Insurance history and what the tail would cost. That set answers the owner dependence question from evidence, and evidence is the only thing that moves the range.
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Service business valuation: common questions
Valuing a service business: what discount does owner dependence really carry?
There is no published figure and anyone quoting one is guessing. What can be said is the direction and the mechanism: the more of the revenue that follows a person, the more of the price moves out of completion and into an earn out tied to what stays, which changes both the headline number and how much of it you actually receive.
How to value a service business with no contracts?
On the pattern of repeat work rather than on paper. A buyer looks at how many clients return, how long the average relationship lasts and what share of revenue came from clients who were there two years ago. Where there is no contractual backlog that history is the substitute, and it is only persuasive if it comes out of a system rather than out of memory.
How do you value a service business that is really one person?
Usually as the price of a transition rather than as a multiple of earnings. The realistic structures are a long handover with the price tied to retained clients, or a sale of the client list to somebody already in the market. Both are real outcomes; what does not happen is a clean completion at a trade multiple, and knowing that early changes what you should be preparing.
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