The process of selling a consulting firm can be a fragile affair. For every M&A deal announced there are many more that fail or never get past the courtship stage for a wide variety of reasons.

We talked last week about some of the reasons deals can fall through including, taking too long to complete the deal, conflicting interests among shareholders, and sales famines while buyers are looking.

This week, we thought we would explore some more of the most common deal breakers and include tips on how to avoid them.

Don’t get cold feet

Deals can fall apart simply because owners have reservations or anxieties about selling. You don’t want to change your mind halfway through, so don’t enter the process half-cocked. Have clear objectives in mind and for each individual, pin down who wants to stay and who wants to leave and in what period of time. Do this and everything will be on the table up front and there will be much less scope for prevarication and indecision.

Don’t leave room for nasty surprises in the finances

The last thing you want during the pressure of due diligence is for the buyer to discover your ignorance or lack of understanding about the financials in your business. Or even worse, uncover something nasty that you should have spotted and dealt with in advance. This could be a simple accounting mistake, or a hidden bombshell like a fraudulent entry. If you have a finance director with an eye for detail and whom you’d trust with your life, you’re probably covered. If you’re not in this enviable position, then take measures to get your accounts professionally audited. Don’t enter the sale process until you’ve tested and retested your knowledge of all the numbers – the costs, revenues and profits – that govern your business.

Do find buyers with the right culture

Too many deals never get off the ground because of a culture mismatch between the seller and buyer. The buyer is going to walk away if they think integration will be difficult, and you’ll walk away if you’re worried about how your staff and clients will work with the new entity. Our rule ‘one buyer, no buyer’ applies here. The chances of cultural alignment are improved if you talk to a range of buyers. An M&A partner can be especially helpful here as it can undertake research and select buyers that ‘best fit’ your organisation. This is particularly important as the deal progresses through the due diligence phase when it’s likely that your team will have to meet at close quarters with the buyer’s management team to work on integration details. If your teams don’t get on the deal could be in jeopardy. By this late stage re-connecting with previous bidders is extremely difficult. It probably means starting the whole process from scratch at a later time and dealing with de-motivated shareholders that are rueing missed opportunities!

Do walk in the buyer’s shoes

When all the pleasantries are over, it always comes down to price. We’ve never met a seller who didn’t think their consulting firm was worth more to them than it was to the buyer. If you’re going to drag the buyer over the bridge between their price and yours, you need to be able to justify it and not come across as greedy. The best way to do this is to have a sound understanding of deal values in the current consulting M&A market, and know the synergy value of your firm to the specific buyer; something for which they will be willing to pay a premium. In short, it’s all about knowing the market, salesmanship, and seeking out a range of buyers with synergy who want to compete to buy your firm.

Finally, to conclude:

Don’t let bad luck strike

It’s difficult to mitigate bad luck. With all the best planning in the world, something unforeseen and unimaginable inside or outside your firm could happen. The best you can do is to plan for the unexpected just like you would with any other event in your organisation. If there is, however, one thing that’s more likely to thwart your progress to sale, it is your client market collapsing during the deal process. Diversity in your clients and markets is the ideal way to be safe from external issues. Back to our very first point, the longer the deal takes the more likely you expose yourself to bad luck, so aim to complete a deal as fast as possible.

You can of course make your luck by taking note of all our deal breakers to manage the risk…. then, it’s just a case of keeping your fingers crossed!

We have started a discussion in our LinkedIn Group on this topic. We would welcome your views and we will answer any questions you may have.

The decision to sell your consultancy is one of the biggest that you’re likely to make in your life and it is a decision fraught with complexities. The reality is you don’t know what you don’t know and that’s what we are aiming to address with Equity Edge, our recently launched resource and information hub for consulting firm owners.

The process of selling a consulting firm can be a fragile affair. All the initial goodwill and grace between you and the buyer can quickly turn into negotiating stand-offs and eleventh hour fall-outs. Months of meetings, due diligence, planning and drafting sessions can quickly evaporate due to nasty surprises, unclear expectations or just plain bad luck. Having the right people involved in the process can make a big difference.

For every M&A deal announced there are many more that fail or never get past the courtship stage for a wide variety of reasons. Based on our experience over the last few years of watching buyers and sellers walk away from the table, or seeing sellers reluctantly settle for tougher terms than they deserve, we thought we would explore some of the most common deal breakers and include tips on how to avoid them.

Don’t take too long to complete the deal

The risk of the deal failing over time follows the Pareto Principle; there’s a 20% risk of failure at the thin end of the time curve and 80% at the thick end. The longer time goes on, the more opportunity there is for something nasty to be found by the buyer and a greater chance of you falling out of favour with lady luck. Consultants are meant to be good at project management – so put it to use. Before you take your firm to market, make sure you have all the bases covered in the sale preparation and get the right resources ring-fenced so that all eyes are on the important balls.

Don’t enter the process with conflicting interests among the shareholders

If you have a complex share ownership structure you don’t want things getting messy when the buyer comes to the table. While you as the main shareholder may be highly motivated to sell, or settle for a certain deal structure, perhaps a junior director who hasn’t yet earned all his/her shares will have a very different view. If this comes out when the buyer interviews key staff, things will get complicated and it will be difficult to strike a deal. The only way to ensure this doesn’t happen is to resolve these issues with each and every shareholder in the process leading up to the decision to enter the market.

Don’t miss your financial forecast during due diligence

Missing your financial forecast during the sale process is very bad news. The buyer will worry about your financial management and may want to dig deeper into the cause, which in turn may uncover additional issues as they drill down into your financials. There are some things out of your control, but it’s within your power to make sure that you have a robust financial management and forecasting process and to choose the time to take your firm to market when you’re confident in the stability of your numbers.

Don’t suffer sales famine while buyers are looking

This is crucial because the profit multiple the buyer is prepared to offer is significantly dependant on their confidence that your profits will continue into the future. Clearly, if your pipeline reduces unexpectedly during the sale process then a fuse is going to trip in the buyer’s mind. It is likely it will trigger a deeper examination of your sales and marketing process and a possible reduction in their bid. Depending on your sales cycle, you need to put a concerted effort into sales and marketing in advance to make sure that the engine is tuned and everything stays on track during the sale process and beyond. Getting this right will also reduce the risk of missing future financial forecasts in earn-out circumstances or when your deal structure relies on future targets being met.

Don’t risk important people defections part way through

Losing a senior or key member of your staff during the process will do two things for the buyer; they will question the quality of your HR management and want to re-assess the value of their prospective acquisition. This issue is linked to conflicting stakeholder interests above but mostly it comes back to the measures you’ve taken to lock-in key staff well in advance of sale. If you’ve introduced motivational reward and recognition programmes along with an equity share ownership scheme, then you’ve probably done the best you can to reduce this risk. Don’t forget that 70% of something is worth more to you than 100% of nothing!

We will continue to examine the reasons a sale can fail in next week’s blog but in the meantime if this has raised any questions for you, we have started a discussion in our LinkedIn Group on this topic and would welcome your views.