Reasons the sale of a consulting firm can fail – Part 1

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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.

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