We launched our first Buyers Research Report in October and in that time we have presented our findings to consulting firm owners both in the US and UK. Here, we share some of the questions we’ve been asked during this process and our answers.
If you’d like to ask a question, yourself or hear more about our findings, you can join our free UK webinar, ‘Thinking of selling your consulting firm? 5 things you need to know’ , from 12.30pm to 1.30pm GMT 11 Dec 2014.
If my firm falls outside the size range that buyers indicated was most attractive to them ($15m-$40m) does it follow that it will be harder for me to sell?
No, not necessarily but what it does mean is that you’re likely to have a slightly smaller pool of potential buyers. $40 million is a very large size for an independent consulting firm. Firms larger than this, that are focused in a particular niche or have a highly valuable service offering, are extremely sought-after.
What are your thoughts on the minimum size of firm that a buyer will be interested in?
In terms of the market, firms of all sizes sell. In fact if you consider firms smaller than $5m to be ‘very small’, about 40% of the market volume is in this size category. However, size is important to buyers because firms that are too small are generally high risk (financially unstable). But there are exceptions. Small firms that are rich in tangible intellectual property that the buyer can leverage rapidly through its organization are seen as worthy acquisition opportunities. You can read more about this in our article, Does size matter?
Are there any nuances in your research regarding specialist firms, for example, industry sector specific firms?
What buyers have been very clear with us about is that they like specialists. They like a consulting firm to have focus in both what it offers and in what markets. For strategic buyers this makes it easier for them to identify what a target firm does and how it fits into their organization. Industry specialization is a positive or, more accurately, the flipside is that diversification in service offerings and industries serves as a negative.
How long must an upswing in revenue and profit be maintained for a company to be attractive to buyers?
The key is explaining why it happened. You can demonstrate an upswing for as little as three months and get significant credit for that if the reasons are good. What did you do to achieve the upturn and how you will ensure it continues?
How do buyers view the business development function of small firms if they have only one or two rainmakers – is this a deal breaker?
No, typically they look at what the leadership team is bringing in compared to the rest of the firm and if this proves higher or lower than they norm then expect them to ask why. Also, it depends on the scale of the business, so if you are a $30m firm and 90% of the business is brought in by two people then they will want to know why this is.
How are buyers thinking about value, how are they determining value for the firms they buy?
Buyers will typically take a view of delivered profitability over some period of years. Equiteq’s valuation model takes a six-year view of financial performance both backwards and forwards. This is very similar to what buyers do. In our model we will discount by a proprietary and custom measure of risk that we institute with all of our clients. Buyers are typically doing the same; they discount the future based on their perception of risk in the future.