The Best Practices Study is the M&A-valuation standard, but its value depends on reading it correctly. The methodology layer covers the disciplines that separate sound BPS analysis from undisciplined number-citation: the Pro-Forma adjustments, the Rule of 20, the average-vs-top-quartile selection, the variance workflow, and the deep-track metrics. This page is the methodology overview.
The valuation foundation.
The most common BPS-reading error is misunderstanding the Pro-Forma adjustments. BPS reports profitability on a Pro-Forma basis: owner salary capped at market rate, excess benefits and perks removed, one-time items excluded. The adjustments are what make the EBITDA comparable across agencies and usable for valuation — but they also mean the BPS profit figure differs from an agency's reported (un-adjusted) profit.
The practical implication for diligence: when comparing a target's profitability to the BPS benchmark, the target's profit must be normalized the same way — owner comp adjusted to market, perks stripped, one-time items removed. Comparing a target's un-normalized profit to the BPS Pro-Forma benchmark is an apples-to-oranges error that systematically misreads the agency's position.
The readiness screen.
Organic Growth % + Pre-Tax Profit % ≥ 20. The Rule of 20 compresses growth and profitability into a single deal-readiness number — the fastest premium-candidate screen in agency M&A.
The Rule of 20 is the methodology's signature heuristic. The formula — Organic Growth % plus Pre-Tax Profit % — produces a single score; a result of 20 or higher marks a premium-valuation candidate. The value is the compression: growth and profitability are the two dominant value drivers, and the Rule of 20 combines them into one fast screen. A buyer screening a deal pipeline uses it as the first-pass filter; a seller preparing for sale uses it to identify whether their gap is on the growth side or the profitability side.
Selection and the missed metrics.
The average-vs-top-quartile selection is the third discipline. The average column is the primary benchmark — where the typical agency sits. The top-quartile column is the aspirational stretch target — where the top 25% sit. Confusing the two mislabels a typical agency as underperforming (compared against top-quartile) or overstates a strong agency's position (compared against average). The selection depends on the question: a competitive seller benchmarks against top-quartile to justify a premium; a buyer assessing typical performance benchmarks against average.
The methodology checklist for sound BPS analysis:
- Normalize the target's profit the same way BPS does (Pro-Forma) before comparing.
- Compute the Rule of 20 as the first-pass readiness screen.
- Select average vs. top-quartile deliberately based on the question being asked.
- Run tier-and-segment-matched variance analysis, not blended-average comparison.
- Check the deep-track metrics — the easy-to-miss BPS data points (specific productivity, balance-sheet, and producer-economics measures) that most analysts overlook.
The deep-track metrics are the methodology's advanced layer — the four or so easy-to-miss BPS measures that experienced analysts use but casual readers overlook. The BPS methodology completes the BPS sub-cluster alongside the tier benchmarks, trend analysis, and strategic context pages. It pairs with the GPS methodology page — the two methodologies together cover the benchmark-selection and variance discipline across both datasets.