Focus on Private Equity Buyers

Private Equity cropped

In this blog we will spend some time examining Private Equity (PE) buyers – a group of buyers that acquire consulting firms primarily for investment reasons. We will explore some of the benefits that a deal with this buying group offers, as well as the considerations you need to think about as a consulting firm owner.

In our latest Global Consulting M&A Report, we divide the buyers of consulting firms into two groups. Roughly 90% of buyers are categorized as ‘trade’ or ‘strategic’, where the buyer seeks some form of synergistic benefit from the acquisition, such as reaching a new market place or geographic area, and just under 10% are ‘financial’, such as PE, buying for a straight return on investment.

PE buyers tend to become more interested as firms increase in size – the percentage of financial buyers rises to 18.9% if we eliminate deals under $20m. However, if your firm is small but in a hot sector with a certain set of attributes attractive to PE buyers, they could be interested in investing. And if rapid growth is your goal, then a financial buyer could be a good match.

Why would a Private Equity investor want to buy a consulting firm?

Unlike strategic buyers, PE buyers exist to sell profitable companies at a value higher than they purchased them. This is their business model. Service businesses like consulting firms, if well run, have a reputation for delivering high margins and good cash flow. This presents an opportunity for PE buyers to put capital to work building high growth, high margin businesses.

The consulting sector is an industry with high-growth opportunities, especially in the right sector and with the right service offering. The oil and gas industry is one such area of interest, for example, and you can read more about our intelligence on this here.

What would make a consulting firm attractive to a PE buyer?

There are certain characteristics that would attract PE buyers. We’ve mentioned size being one such factor. But others include: a concentrated ownership consisting of just one or two partners, a focused service offering with healthy profit margins, as well as concentration within one or two key sectors.

Why would a PE buyer be attractive to a consulting firm owner?

A PE buyer can make a very useful and strategic partner in the right situation. The following are some of the key benefits that the right PE partner can deliver:

  • At the right time, investments from a financial buyer can provide the impetus to accelerate a firm’s value
  • A PE deal can allow an owner to ‘de-risk’ by diversify ownership but still keeping a stake in the business
  • PE firms with experience in the sector can provide crucial guidance through difficult growth phases, and potentially make helpful introductions to partners or clients

Why wouldn’t a PE buyer be attractive to a consulting firm owner?

There are a number of factors to be wary of if you plan to sell to a PE buyer. Firstly, you will have to be prepared to have a partner and give up some control of your business. Because of this, the best deal for your firm might not be the highest price. You will need to look very carefully at the buyer, are they a good partner for your firm? Do they have the expertise and track record to help you? There is a balance to strike between trading the current value of your firm with the long-term benefits the deal will bring.

In the right circumstances PE buyers have much to offer consulting firm owners, especially those owners focused on growing their firm.  You can read more about the two main buyer groups – financial and strategic – and their motivations for buying in our blog: Merger and Acquisition deal drivers in the consulting firm sector.

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