Equiteq Edge: Countering uncertainty with knowledge to give you and your business the edge

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The decision to sell your consultancy is one of the biggest that you’re likely to make in your life. How and when do you start planning for it? Who do you trust to provide the right insights and information? How do you choose your partner?

The reality is you don’t know what you don’t know. So it is with this introduction, that we present Equiteq Edge, our new thought leadership platform that gives you access to all the information you need: analysis of market conditions, advice from people who have been through the process and even intelligence from buyers themselves.

Whether you are on the cusp of selling, have been approached by a buyer or are planning to sell in the next 3 to 5 years, we’ve created Equiteq Edge to be a ‘must have’.

A highlight of our 2014 Equiteq Edge programme includes our first ever buyers’ insight report. We’ve put key questions to corporate buyers and to private equity firms in both the US and the UK. The report will get into the minds of buyers, what they believe, how hungry they are to buy, what’s particularly on their agenda and hopefully an indication of the prices they’re prepared to pay.

There are a number of ways you can be kept up to date with Equiteq Edge. Sign-up for the reports and newsletters to be delivered to your inbox, join and participate in our Equiteq Edge LinkedIn Group or follow us on Twitter.

Finally we’d love to hear from you. What are the issues and questions that keep you awake at night?

Pouring all we know (what to do and how to do it), all we’ve done (more consultancy deals than anyone else) into Equiteq Edge, we will deliver insight that helps you grow and sell your consulting firm.

We look forward to accompanying you on your journey.

Major hire bolsters global M&A service

usa inwords croppedWe’re pleased to announce David Jorgenson has joined Equiteq as Global Head of M&A and will be based in our New York office. 

David has advised business owners, shareholders and C-level executives on every aspect of growth and value realization during his 20-year career as a technology consultant and investment banker. He is an expert in all aspects of corporate financial advisory – from valuation, strategic financial advisory, public and private equity and debt financing, exit planning, M&A strategy and execution. 

“Equiteq’s transactional M&A expertise offers unique value to consulting firms and the opportunity to grow this service globally is very exciting,” David says of his appointment. “I look forward to sharing my experience with a team that is delivering successful and more profitable deals for consultancies through their deep knowledge of the consulting sector.” 

Paul Collins, Equiteq’s Managing Director says: “We are delighted to be joined by David who brings a wealth of highly complimentary experience to Equiteq. We are committed to growing and developing our service globally and David’s appointment, as well as basing the global M&A team in New York, is an important milestone in the company’s growth.” 

David began his career growing networking and internet consulting companies in the mid 1990’s. After his MBA, Finance at Duke University, David joined Robert W. Baird in Chicago. While at Baird, David provided M&A and corporate finance advisory services to professional services, outsourced business services and technology companies up to $2.0 billion in value. 

David will head the global M&A team from New York. Significant growth of the North American market is expected in 2014. Read our analysis on the market here.

Straight from the horse’s mouth: what buyers want

research croppedIn September we will publish the results of in-depth research carried out with 100 commercial buyers in the US and Europe. The report will contain fresh insight into what buyers want, how hungry they are to buy, what’s particularly on their agenda and an indication of the prices they are prepared to pay.

To mark the launch of Equity Edge, our new online resource and information hub, we thought we would provide a sneak preview of some of these findings now.

In line with our own Global Consulting Mergers & Acquisitions Market Report 2014, buyers have told us they expect the market to pick up and deals to increase in volume over the next 2-3 years. They see more opportunities as economies improve in the US and UK.

What is the optimum size of consulting firm they look for? There is a wide spread between the minimum and maximum turnovers of target consultancies but on average, the optimum is a turnover of around $30 million.

There are a number of factors that attract buyers to a consulting firm, but four were deemed the most attractive. The first is financial stability (sales & profit growth and a reliable future forecast), followed by deep domain expertise in one main service area. Unique and leveragable Intellectual Property is also very important, as is being highly differentiated within the market it operates.

“Equiteq has deep knowledge of consulting firm M&A globally and it knows what buyers want,” says Jim Horsley, Equiteq’s research advisor. “But it also knows that information is much more powerful and engaging if it’s coming directly from the horse’s mouth which is why the buyers’ insight report, based on independent research, will be essential reading for anyone looking to grow and sell their consulting firm over the next few years.”

If you’re not already a member, join Equiteq Edge, to be kept up to date about this and other Equiteq reports.

Consulting Sector M&A Deals for week beginning 21st of July

businessman doing handstand on the beachHot Rock Limited (Australia) to acquire OCTIEF Pty Ltd (Australia)
Deal Size: Unspecified Industry: Engineering consulting Date: July 2014

Hot Rock to acquire an unlisted profitable business involved in environmental consulting and hazardous materials testing and with a laboratory in Brisbane. In the acquisition, Hot Rock will acquire 100% of the shares in OCTIEF Pty Ltd, issuing up to 641,508,710 shares to OCTIEF which is currently worth about $4.49 million in total. The deal is subject to approval by Hot Rock shareholders; the current owners of OCTIEF will receive an initial tranche of 320,754,355 shares. OCTIEF studies mine sites, contaminated land sites, buildings, soils and water, which need to be done as part of government and council development approvals for new project developments. Part of its services offered include industrial hygiene, asbestos and hazardous materials management, environmental services (air, water and soil including contaminated land), greenhouse gas emissions assessments, energy use assessments and specialised NATA-accredited laboratory analysis and on-site testing.

KPMG (Australia) entered into an agreement to acquire Momentum Partners (Australia) Pty Ltd
Deal Size: Unspecified Industry: Management consulting / Strategy Date: July 2014

KPMG has entered into an agreement to acquire the business of boutique consultancy Momentum Partners, a strategy and operational improvement firm with a major presence in the mining industry. Upon completion, the firms’ combined team will create the largest hub of mining professionals within KPMG’s global network. “These acquisitions continue KPMG’s investment-led growth agenda. We are aiming to significantly grow our Advisory presence in the mining sector over the next 3 years, supporting growing demand as the industry adjusts to the changes in its operating environment,” said Gary Wingrove, CEO of KPMG Australia. The global mining industry has seen unprecedented growth, correlated to the industrialisation and urbanisation of China. Supply has responded and the industry is now transitioning from capital growth, to the challenges of operational excellence and working capital management. Momentum Partners (Australia) Pty Ltd provides management consulting services. KPMG is a multidisciplinary consultancy.

The CHR Group, Inc. (USA) acquired EmeryMartin Consulting (USA)
Deal Size: Unspecified Industry: Marketing consulting Date: July 2014

The CHR Group, a New York-based, integrated marketing services holding company, announced that it has acquired EmeryMartin Consulting and appointed Betsy Emery Martin chairman of The CHR Group’s digital practice. This deal represents The CHR Group’s 14th acquisition and sixth office opening since the holding company’s founding in 2012. “Our rate of strategic corporate growth and ability to attract top talent like Betsy has beaten my every expectation for our company,” said Jonathan Zaback, chief strategy officer and partner at The CHR Group. “Betsy brings to The CHR Group a level of digital leadership usually found only at the world’s largest professional services firms. Having Betsy oversee all of our current and future digital companies will truly make The CHR Group a must-meet entity for today’s digitally oriented corporate leadership.” EmeryMartin is a leading technology consulting firm helping some of the world’s most respected brands by driving performance and innovation. The CHR Group, Inc. is an integrated marketing services holding company. Continue reading

Sale of international development consultancy to AECOM

roads merging croppedWe are pleased to announce the successful sale of our long-term client, ACE International Consultants (ACE), to AECOM Technology Corporation.

ACE is an international development consulting business headquartered in Spain, providing economic and project management consultancy to a wide range of governments in emerging economies.

AECOM has been ranked as a leading engineering design firm, with over 45,000 employees, including architects, engineers, designers, planners, scientists and management and construction services professionals. Serving clients in more than 150 countries, it provides a blend of global reach, local knowledge, innovation and technical excellence in delivering solutions that create, enhance and sustain the world’s built, natural, and social environments.

Bruce Ramsay of Equiteq was the lead advisor to ACE and commenting on the deal he said:  “Many consultants in this industry focus just on the delivery of a range of projects, and expect to build value just from their revenues.  Antonio Bonet, founder and CEO of ACE and his team invested in their underlying methodologies, building a single system to support the process from initial market news on potential projects, through all aspects of bidding and project management, right through to invoicing. It was this tight measurement and management of the business, combined with the sector focus, that created the revenue growth and an attractive target for potential acquirers.”

Another successful sale is further evidence the market is turning a corner and that 2014 is likely to see significant growth in volumes and prices, as our Global Consulting Mergers & Acquisitions Market Report 2014 suggests.

We have extensive resources that provide information as to what firms can do to make themselves attractive to buyers in the Growing equity value in your business section within our online resource, Equity Edge.


Significant growth for North American market in 2014

North america croppedConsulting firm M&A activity in the USA has reached its highest level since 2006. Deal volumes in North America – USA accounts for 92% of this, Canada 8% – are up 11% according to our Global Consulting Mergers & Acquisitions Market Report 2014, the only publicly available information on the global consulting M&A market.

Last year we forecast a gentle upturn, and there is no doubt that this has come to fruition. Our prediction now is that 2014 will see significant growth in volumes and prices in the US market. This is in line with the improving macro-economic climate and the general M&A market.

Price rises are another sign of confidence returning. North America saw the greatest increase in multiples used to value companies. Revenue multiples were up 40% in 2013 compared to 2012. EBIDTA multiples have dropped 7.2% but this reflects how firms are becoming more profitable rather than less valuable. Going forward, analysis of the first quarter in 2014 shows prices are stabilizing around 1.2 as a revenue multiple and 6 to 7 as an EBIDTA multiple.

From our own experience, we are seeing a significant rise in the volume of enquiries to the business from North America. These are coming from small and medium-size consulting businesses looking to exit through to larger consulting practices looking for help to find and acquire targets.

However, unlike the previous boom from 2005 to 2007, we do not see a dash for just any sort of consulting capacity. Certainly there will continue to be some large ‘acquisitions of scale’ but rather buyers are looking to acquire capability that they can scale from.

Below we have outlined a number of trends we are seeing in the consulting firm market that is fueling M&A activity:

  • More clients have an international footprint and firms recognize the benefit of having a presence in multiple territories in order to serve clients on a global scale
  • Consulting firms want to broaden the value chain of services offered to clients to claim more of the ‘relationship’ and create a barrier to competition
  • Hot sectors seeing growth are in high demand and include, healthcare, energy, big data and business analytics
  • Independent strategy consulting firms are being acquired as boutique ‘incubators’; they are being kept separate to develop new capabilities

In conclusion, for a consultancy to be attractive to buyers, it is important to have both a market focus and a set of unique capabilities that can be leveraged across the buyer’s network.

We have extensive resources that provide information as to what firms can do to make themselves attractive to buyers in the Growing equity value in your business section within our online resource, Equity Edge.

A copy of Equiteq’s Global Consulting Mergers and Acquisitions Market Report 2014 can be downloaded here.


Merger & Acquisition deal drivers in the consulting sector

cropped buy and sellThe most common reason for one consulting firm to acquire another is to strategically enhance their business e.g. to help reach a new market place or geographic area. However, the growing number of private investors and private equity firms active in the consulting market mean that people are now also acquiring purely for financial and investment reasons.

Our 2014 Global Consulting Mergers & Acquisitions Report in the consulting sector has some statistics on this. In the meantime we’ve outlined what buyers are looking for when considering an acquisition.

Firstly, what are their considerations when the motivation is ‘strategic fit’:

1. Company Scale. Their firm struggles to win lucrative contracts with key clients because their scale does not compare with larger competitors. They need to acquire to achieve the scale necessary to attract the kind of clients that sign the bigger deals.

2. Shareholder Pressure. They may be a plc with pressure from investors to grow shareholder value, but their organic growth options cannot deliver. Acquiring a private firm on a profit multiple less than their own traded multiple will achieve growth faster and add instant value for their shareholders.

3. Global Extension. Their target clients are increasingly global and they don’t have the international profile necessary to compete. Acquiring a company to build a global presence, or achieve a local culture fit, will expand their firm’s capabilities to attract and service clients in their chosen markets.

4. Sector Extension. They have a strong track record in one industry sector, their service is transferable into other sectors, but they know that cost of entry is going to be high. Acquiring a similar firm with an existing track record and a client list in other sectors will accelerate their entry into new industries.

5. Service Extension. They have excellent skills in their domain, but there is a demand for services adjacent to theirs and they don’t have the skills to service it. By acquiring another consulting firm with the competencies they require, they are able to increase their footprint in the combined client list and develop new business elsewhere.

Understanding the motivations of buyers to acquire for strategic reasons, presents an opportunity for you to view your consultancy through their eyes. It can help you assess what aspect of your business makes you attractive to a potential buyer – perhaps even challenging some previously held assumptions about how you grow your business to prepare it for sale.

What are the financial motivators for private equity firms and investors:

1. Pure Investment Potential. They are a wealthy investor who needs to achieve a better return on capital and they are looking for a cash generative business with healthy profits. Service businesses like consulting firms, if well run, have a reputation for delivering high margins and good cash flow. This presents an opportunity to spread the risk and improve the return from their portfolio.

2. Leveraged buy-out. They are a private equity firm with an obligation to provide an outstanding investment return to their fund providers. A private consulting firm, with founders that are ready to retire and a good management team who are ready for the next stage of growth, presents a good investment opportunity. They will buy out the owners for cash, but provide most of that cash through loans against the business. The founders are happy, the firm grows, pays off its debt and both the private equity firm and management team will benefit.

3. Distress Sale or Turn Around. They make their living by finding firms that are under performing but have the potential to do much better. They want to find a mature consulting company with a poor order book and a worn out management team, ready to sell at a significant discount to the potential market value of the firm. They will acquire the firm, turn it around, and sell it on a year or two later for a significant capital gain.

In September we will publish the results of in-depth research carried out with commercial buyers in the US and Europe. The report will contain fresh insight into what buyers want, how hungry they are to buy, what’s particularly on their agenda and an indication of the prices they are prepared to pay.

If you’re not already a member, join Equity Edge, our thought-leadership programme to be kept up to date about this and other Equiteq reports.

Consulting company valuation method

dollar cropped 1Often the stimulus for a company sale starts with an understanding of the value of your firm in the current market. As market conditions change from year to year, timing a sale can make a dramatic difference to the price achieved. Some firms however are just interested in the current value in order to create the benchmark for value improvement over the coming years.

Our work not only involves sale and acquisition transactions, we also help firms grow equity value over the long term. The valuation methodology we use calculates a current value but it also makes the link between cause and effect on company value. As you will see this goes well beyond just an understanding of the financials.

Calculating your equity value as an EBIT multiple

Our valuation method is a 4-step process that starts by looking at averages: an average firm in your sector sold in average market conditions over the past 5 years to the average buyer. We then adjust that value up or down depending upon your financial profile, your investment risk profile, current average market conditions and our view of the buyer’s appetite for your firm if it was on the market today.

Our consulting industry M&A database that provides us with a lot of the base data used in the valuation process, is 50% historical information on previous M&A deals in the industry and 50% company information. The latter is broken down to include financials, sector and service expertise profile of all firms in the UK and other places across the world. Our 4 steps to a company valuation are as follows:

1. Financial Analysis

We look in detail at your historical and projected financials. We make adjustments for any one-off expenses that could be argued as not part of normal trading costs. We also adjust for abnormally high or low compensation levels. We calculate the year on year growth in this ‘adjusted’ EBIT and assess your ability to generate free cash flow from profits in a sustainable way. We then apply a multiple to this adjusted EBIT to generate an investment return commensurate with the risk profile for the average consulting firm.

2. Equity Risk Assessment

We use our 8 levers of Equity Value’ model to determine if there are any risk factors associated with your firm that would make it a worse or better than average investment opportunity as compared with the average for the industry. For example, under the section ‘Quality of fee income’, if you could demonstrate long-term contracts with clients then you would have a lower risk profile than most consulting firms. Alternatively if more than 25% of your fee income was with one client and with no long-term contract then we would judge you to be higher risk than average. This would affect your score in this segment of our equity value wheel and may increase or decrease the multiple applied to your EBIT in calculating value.

Our 8 levers are based on extensive experience and research into those factors that buyers assess when looking to value a consulting firm. We review them regularly. This is important because buyer sentiment does change over time. For example, even 5 years ago, it would have been difficult to get a good price for a consulting firm where 50% or more of its consultants were freelancers or ‘associates’. Today this is seen by many buyers as attractive because it infers an ability to reduce costs fast – and thus protect earnings – if the market takes a downturn.

3. Market Premium

The EBIT multiple used in step 1 assumes average market conditions. We hold data on multiples in our sector going back to the year 2000. We have also correlated this data with general market data going back 75 years. At any point in time we are able to calculate a discount or a premium to the market average. It is a seller’s market for consulting firm owners in the UK at present with premiums of around 15%. This is down considerably from the 40% high we saw in 2009, but our prediction now is that 2014 will see significant growth in volumes and prices in the market in line with the improving macro-economic climate and the general M&A market.

4. Buyer Synergy Premium

So far all of our calculations are independent of the type or specific buyer. However the price premium associated with finding the right synergistic buyer can swamp any premium associated with your growth, profit levels or even market premium. We have seen synergy premiums of 400% and so it really does pay to research the right buyer for your firm. Buyer synergy means that you have persuaded the buyer that your firm can grow their firm faster than it could grow without you. In these circumstances the investment return calculation becomes more than just based on your financial forecast. You are selling the story that together ‘2+2=5’ so that the buyer can justify paying a higher multiple of your profits to get this joint growth. It is in this area that Equiteq’s data excels. We can calculate a ‘buyer synergy premium’ based on our comprehensive database that we outlined above, which indicates the relative attractiveness of your firm to the potential universe of buyers.

In conclusion

The resultant valuation from the above 4-step process gets as close as you can get to a target price based on actual deals done in the consulting sector, comprehensive sector market data and the experience of hundreds of buyers of consulting firms.

Are you building your consulting firm for lifestyle or sale?

bike croppedYou will have your own story as to why you set up your own business and the approach you have to running it. In our experience, the motivating factor for building your firm will fall into one of two categories: lifestyle or sale.

If your firm has become a lifestyle business, you enjoy what you are doing, and are balancing personal life with income generation, then it may make sense to carry on doing what you’re doing. The only question we would ask is, are you putting enough away from your earnings each year to fund your retirement, so that when the day comes when you can’t or don’t want to continue you’ve achieved financial security? Consulting is a young person’s game, it’s exhausting and you’re not going to do it forever. At some stage you’ll get off the wheel – will you have the means to do so?

There are also a lot of people who run a lifestyle consulting business because they’ve never considered the possibility of selling it. They think that a people business can’t have any value. On the surface, it’s an understandable misconception: all of the assets of the business have got legs.

There are a lot of people who would view a consulting business with the sort of partnership mentality found in accountancy or law, where the name of the game is to extract as much cash from the business on an annual basis as possible and not worry about the end game. However there are two reasons why that may not be the most lucrative approach.

The first is that every time you extract money from a company; no matter how clever you are at getting it out you pay tax, either as income tax or tax on dividends.  So the idea of extracting money each year and putting something away is fine, but it’s not the most tax efficient.

The other reason is that you can ‘have your cake and eat it’ because there’s nothing to stop you extracting as much cash as you want each year and at the same time building a business that’s got some equity value that you can realise at the end of a certain period of time. The ideal scenario is that you just keep enough cash in the business to be able to achieve your growth objectives.

One of the great things about a consulting firm is that it doesn’t consume that much cash to grow, you’re not investing in capital equipment or buildings and things like that, you are in essence just managing the gap between when you get paid by clients and when you have to pay staff salaries. If you’re really clever that gap can be zero. You will need to leave some in for additional sales and marketing, product development and things like that to fund your growth, but you shouldn’t have to leave too much in there. If you do the right things, you’re going to have a business that’s worth something.

It’s rather like saying to somebody: you can spend the next five years working with clients and doing great stuff and taking a good salary, or do exactly the same thing and build up a pension scheme at the end.

So it’s a choice, you can build something of real value that you can sell onto somebody else or just walk away with nothing.

Can you beat zero working capital in a consulting firm? Why you should bill your clients from day one

cashflow croppedWhoever said, ‘profits are an opinion, cash is fact’ is absolutely right. It is a sentiment echoed by most consulting firm owners but unfortunately not translated into the working practices of cash-flow management in their companies.

Cash flow is a common problem in the consulting industry, but its also an important equity value issue that needs to be resolved if you want to sell your firm. When your potential acquirer or investor takes a good look at your financials, good cash-flow management sends a very positive signal. The opposite rings alarm bells.

Why is it a common problem and what can you do about it? 

A typical scenario of poor cash flow goes something like this: you’re approaching month end in August with an upcoming invoicing run and you need to pay your consultants. You chase your team for their timesheets and expenses so that you can bill your clients, however whilst timesheets are not a problem, expenses are (because it’s a hassle). In fact most slip to September so there’s a delay in getting the bills out and your clients won’t receive their invoices until September month end. Your best clients will pay by the end of October, but other debtors may extend payment to 60 or 90 days. Meanwhile you’re paying your employees on time, but it’s at least 90 days before you’re recovering costs and getting the cash in for work done. In conclusion: you’re left with a working capital headache.

The root cause of the extended delay in this scenario is that the expense collection process is linked to the invoicing run. However even if you have the slickest process in the consulting industry, and everyone puts their returns in on time, at best you’re collecting money somewhere around 45 days after delivery. Does that sound fair to you? Most purchases we make every day require payment before, or on delivery, so why can’t this be the case in consulting?

How to achieve a working capital requirement of zero:

The first step is to divorce the two processes of invoicing and expense administration. When you agree a piece of new business with a client, you ask for fees plus 15% for expenses (25% for foreign contracts) and agree to reconcile against actual expenses every 90 days. Most clients like this approach because it’s predictable. Not only that, if there’s one thing that causes most billing arguments with clients it’s the expense charge. This approach reduces the risk of conflict considerably.

Secondly, you bill them on day one. At this point we can see you shuffling in your seats but in reality, if you have difficulty with putting this to a client, then the problem is in your head and nowhere else. In our experience 8 out of 10 clients don’t even raise an eyebrow. This should be your start point when you sign a deal, the worst that can happen is you get into a debate and lose, but 80% of the time you’ll not even have to discuss it if you keep your nerve!

In summary, phasing should look like this:

Day 1 – Forward bill fees for next 30 days

Day 1 – Forward bill expenses for next 30 days

Day 30 – Clients settle account

Day 30 – Pay consultants

Day 90 – Reconcile expenses with client

Net Result – Zero working capital and cash positive

If you can put this into practice, you’re going to give a potential investor a warm and confident feeling about your business and it will increase your chances of a higher equity value.