This week we have a guest blog from Lars Tewes, Managing Director, SBR Consulting. As a sales performance consultancy, SBR Consulting work closely with Partners and Directors to “liberate the sales potential” within their practices. Contact Lars with your sales challenges and questions at firstname.lastname@example.org.
For many, the summer is a wonderful time to enjoy a much needed annual break, however it can have one potentially adverse knock-on effect which, if you are not careful, can put you back a quarter – loss of business development (BD) momentum.
In your sales journey with each prospect it may have felt that at least one person you’ve been looking to sell to has been away for the past couple of months and so, frustratingly, closing business has taken longer. Also, we know that the longer decisions take to be made, the greater the chance that, for whatever reason, they never happen. Therefore, September is a crucial month to regain the momentum around activity and accountability. If this is not addressed, 10-30% of your firm’s revenue may not happen in 2016, if at all – a huge dent in the bottom line.
Bigger consultancies are just as at risk of this as smaller ones. Sector BD leads having been on vacation can make a big impact on the new business coming through if they don’t make BD a priority upon their return. And while large consultancies have more people working on BD, they also have correspondingly larger targets to hit. So it’s important for the firm’s BD leads to hit the ground running on return from leave.
If you’re thinking of selling your consultancy, there are many stakeholders to consider before embarking on the most important financial decision you’ll probably ever make.
1. Founder shareholders
We’ve had business owners wrongly assume that selling a business is like selling a home. If a sale falls through, your home remains largely unaffected and its value intact. However, that is not the case with a business – you only need to consider the time and effort spent on setting up a deal, along with vital competitive information you might have shared in the process. And, if you’ve never done this before, you lack the experience and knowledge to negotiate the best possible deal for you and your business (especially when earn outs are involved).
When engaging in a sale process, consultancy owners become distracted from the day-to-day job of bringing in new business and growing the firm, which can have a detrimental effect on equity value – another reason to bring in expert support.
Tip: Buyers are not interested in a business whose growth has either flat-lined or is in decline.
By Alex White, Managing Director, Head of M&A and Strategic Advisory, Europe, Equiteq.
Last week we looked at how it’s important to ensure that shareholders in the business are aligned before preparing for sale. This week we’re exploring why equity incentivizing your senior team can improve the equity value of the business.
The gold standard to successfully grow and realize maximum value in people dependent businesses requires a high degree of shareholder and management team alignment, as well as strong financial performance.
Awarding shares (or options) to the right people in the right proportions is one of the most powerful tools at the founding shareholders’ disposal. It’s not the only tool, but it is the most potent, which also makes it risky if applied badly.
There are 7 key areas to consider.
Consulting M&A Activity and Equiteq Consulting Share Price Index Performance
In August, we saw some notable deal activity from regular buyers of consulting businesses and mixed performance from listed players contained within the Equiteq Consulting Share Price Index.
The share prices of consultants focused on cyclical industries, particularly the energy sector, were impacted by volatile oil prices and the release of favorable U.S. and European economic data in the month. We also saw some earnings announcements from listed professional services businesses, most notably from prolific consulting buyer WPP, whose earnings for the first half of the year highlighted that the advertising giant had benefited from the U.K.’s vote to leave the European Union as a favorable currency translation more than offset any negative effect of Brexit on the British economy. WPP’s shares rose following this earnings announcement by as much as 5.7%, its biggest intraday gain in almost 3 years.
There was continued notable activity in the month from professional services buyers, building on their growing Channel 2 (non-Assurance) offerings. The most notable professional services deal in August was EY’s acquisition of Society Consulting, a 150-person Seattle-based specialized analytics consulting firm. Growth in the consulting businesses of large accounting players has countered falling profitability from some of these firm’s assurance businesses, which are feeling the impact of increasing competition and the technological automation of elements of the statutory audit. In line with this trend, PwC UK announced at the end of the month that it will be recruiting over 1,000 new specialists by 2020 to meet increasing client demands for cyber security and privacy, data management and predictive analytics, as well as business systems and technology risk and controls. This week, Deloitte UK also announced its fastest revenue growth in 10 years, noting a strong year for its already well established advisory business, highlighting high levels of demand for M&A, risk management & regulatory, as well as business transformation capabilities using technologies such as digital, cloud and analytics.
Some may think that once the shareholders agree they’d like to sell the business, then this means that everyone is on the same page and it’s now a matter of finding a buyer. However there are a wide-range of issues that need to be agreed on in order to present a united – and attractive – front to prospective buyers.
Timelines and value are two of the most immediately evident points to agree on. If one shareholder wants to sell now for $1m, the second shareholder wants to sell in 2 years for $5m and the third wants to receive $10m for their share no matter how far in the future, then there needs to be some discussion about how to get the best outcome for all involved.
There is then the practicality of what actually gets paid. A deal can be structured in a variety of combinations with cash, shares and earn out lengths all in play and of differing appeal to shareholders involved. Shareholders will receive a payment which is proportionate to the terms of their agreement and a good deal adviser will keep all parties apprised of changes and what they will be taking out of the business at all times. Before embarking on a sales process, consultancies should ensure they have a well-drafted shareholder agreement to avoid problems down the line when a sale is well advanced.
This week we have a blog from Marc Jantzen, founder and former CEO of Blue Sky Performance Improvement, who sold his consultancy to Capita in 2013. He is now an Associate Director at Equiteq.
We’d been building value in our consultancy with a view to selling it for several years and I was pleasantly surprised at the speed with which we received an offer, and at its size, when we decided the time was right to sell. However this was by no means the only surprise in a sale process during which I learned a lot.
Balancing everyday operations and deal demands
While there will obviously be more work to do during the deal process, the challenge of running the business in parallel with meeting information requests for the deal should not be underestimated. Bear in mind too that if you choose not to share the fact you’re looking to sell widely with staff, you will find yourself requesting information from staff and not being able to explain exactly why you need this data.
And the demands do not fall only on the management team; the finance team’s workload also increases dramatically. If I was going through the process again now, I would hire additional resource for our finance team, because we found that they didn’t have time to keep on top of our debtors like they normally did. This affected our working capital, which is a key figure that buyers scrutinize.
Consulting buyers report “business as usual” with respect to acquisitions in the U.K. and Equiteq’s Consulting Share Price Index continues to rally beyond pre-Brexit levels, supported by the release of a string of robust economic data.
Two months on from the U.K.’s vote to leave the E.U. and the vast majority of the U.K. and overseas consulting buyers that we are in regular discussion with report that it is business as usual as it relates to their strategy for acquisitions. Robust investor confidence in the consulting and IT services sector is also evident from the continued rally of the Equiteq Consulting Share Price Index beyond the levels reached pre-referendum, with some consulting sub-segments touching record highs. This positive sentiment is supported by the strong U.K. and European economic data that has been released over the past two weeks.
As we discussed in our last quarterly update, the initial period following the U.K. referendum was marked by a spike in volatility, particularly as it relates to the trading of equities and currencies. This week it was announced that U.K. manufacturing exports are at their highest level in two years and a Eurozone economic sentiment indicator published by the European Commission rose in July. This market data is painting a more optimistic picture of post-Brexit economic conditions, particularly when combined with the surge in U.K. retail sales and the fall in the U.K. unemployment claimant count, which were both announced this month. These recent economic figures contradict some of the early indications that consumer and investor confidence was falling in July.