What is a data and analytics consulting firm worth?

A data and analytics consultancy earns its money in two quite different ways, and it helps to keep them apart. Project fees are earned once and have to be won again. Platform-management and BI-as-a-service fees recur while the client’s dashboards and pipelines still run through the firm. Add the fact that the client’s own data passes through the firm’s hands, and the buyer’s question stops being “what did this firm bill?” and becomes “how much of this income survives the founders, and what comes attached to it?” This guide explains how that judgement is made. It describes method, not numbers, and any multiple mentioned in general industry discussion is illustrative rather than a valuation of any particular business.

Recurring platform work is priced apart from project work

A useful first step is to split revenue into what repeats and what has to be sold again. A monthly fee to run a client’s data platform, refresh its dashboards or manage its pipelines behaves like recurring revenue: it can be tested against contract terms, renewal history and how much of the underlying work is automated. A project fee, however large, is evidence of past demand rather than a promise of future income. A firm whose last two years were mostly projects may still show repeat demand if the same clients keep returning, and the invoices, rather than a description, are the evidence of that pattern. Where a platform fee is thin and delivered by hand, it is worth asking whether it is really a retainer for the firm’s time at a discount.

Accelerators count only if the firm can prove it owns them

Reusable templates, pre-built pipelines and proprietary models are the part of a consultancy that can be reused across clients, which is why who owns them matters. Under the Copyright Act, computer programs are literary works, the author is generally the first owner, and an employer is the first owner of a work an employee makes in the course of employment unless there is an agreement to the contrary. An assignment is valid only if it is in writing and signed by the owner of the right or the owner’s duly authorized agent. Code written by a contractor, or built on a client’s budget under a contract that hands deliverables to the client, may therefore not belong to the firm at all. The Canadian Intellectual Property Office separates an assignment, which transfers rights, from a licence, under which the owner keeps ownership. The questions to ask are which accelerators were built by whom, on whose money, and under what paper.

Thin delivery depth is a risk

A firm whose pipelines are understood by one senior engineer, or whose client relationships run through one or two data scientists, carries key-person risk. The risk is less about the person’s absence than about what happens to a client’s production dashboard when the only person who understands it leaves. Depth across both data engineering and analytics makes it easier to see how the work could be re-staffed. The same reasoning applies to clients: BDC’s guidance for sellers says an owner will not get full value where there is a customer concentration risk, and a firm with a few anchor clients carries exactly that risk.

How the earnings are recast

A recast can start with adjustments such as replacing the owner’s pay with the cost of hiring someone to do the owner’s job (the add-backs entry explains the idea), and can add adjustments particular to a consulting firm. Long-term contractors can be costed as staff where they work like staff; the Canada Revenue Agency describes an employee as someone who generally works under the direction and control of the business under a contract of service, and a self-employed worker as someone who is not under the direction or control of the payer. Research tax incentives call for caution. The CRA’s SR&ED page describes a claim submitted with the claimant’s income tax return, so it is worth asking whether the credits will still be available to the business it is actually buying, and who has checked.

• Revenue split between platform fees and project fees, client by client, across several years rather than the latest one
• Contract end dates and renewal history for every platform-management client
• How much each senior person bills, and what the firm earns on work that person does not personally deliver
• The cost of cloud, software and data-platform licences, and whose name each one is in
• Credits or grants received, with the claim documents behind them

Client-data handling is part of the risk

Because the firm handles personal information for its clients, any gap between what it says it does and what it does is a risk to look for. The Personal Information Protection and Electronic Documents Act (PIPEDA) makes an organization responsible for personal information it has transferred to a third party for processing, and says it must use contractual or other means to provide a comparable level of protection. That puts data-processing terms in client contracts in focus, and a consultancy that cannot show it follows them may be carrying a liability. In Quebec, the Commission d’accès à l’information has the power to impose administrative monetary penalties on businesses that contravene the private-sector privacy law. These are uncertainties rather than certainties, and how to deal with them in a deal, for example through price, a holdback or a condition that gaps be closed first, is a point for the buyer’s advisers.

Why two similar-looking firms can carry different risk

Picture two firms with the same revenue. One earns most of it from managed platforms for long-standing clients, owns its templates under signed assignments, has three engineers who each know every pipeline, and can show data-processing terms with every client. The other earns most of it from projects, relies on two senior scientists and has client-data practices nobody has written down. Their statements may look alike, but the risks a buyer would be taking on are not alike. Statistics Canada publishes summary statistics for consulting services, and a related table of sales by type of client, which can give an owner industry context, but those tables describe consulting services as a whole and cannot say what either firm is worth.