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.

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