Consulting Sector M&A Deals for week beginning 19th January

businessman doing handstand on the beachAhmann-Martin (USA) acquired Affiliated Benefit Group, Inc. (USA)
Deal Size: Unspecified Industry: HR consulting Date: January 2015
Effective January 1, 2015, Ahmann-Martin will expand its team by welcoming Affiliated Benefit Group, Inc., comprised of long-time benefits consultants, Stephen Warner and Faith Waterstreet-Herber. As part of the integration, Affiliated Benefit Group, Inc. will operate under the Ahmann-Martin name. “We are thrilled to have Steve and Faith on our team,” said Dean Hildebrandt, CEO of Ahmann-Martin. “The services we offer, combined with Steve and Faith’s passion for serving their clients, will make for a prosperous future as our agency moves forward.” For over half a century, Ahmann-Martin has offered an unparalleled breadth of services for a range of industries and niche markets. Along with employee benefits consulting, Ahmann-Martin continues to serve clients in the areas of business and commercial insurance, personal insurance and financial services. “We admire Ahmann-Martin’s values and look forward to teaming with an agency that shares a vision of providing superior value to clients,” said Stephen Warner, founder of Affiliated Benefit Group, Inc. Ahmann-Martin is a full-service national and global provider of insurance, employee benefits, risk management and financial services solutions. Affiliated Benefit Group, Inc. provides brokerage services for employee benefits and human resources in the United States.

Fruition Partners, Inc. (USA) acquired The Manta Group Limited (Canada)
Deal Size: Unspecified Industry: Management consulting Date: January 2015
Fruition Partners, the leading provider of technology-enabled solutions for the service management sector, and a ServiceNow Master Solutions Partner, announced the acquisition of Manta Group Limited, Canada’s only full-service ServiceNow partner and authorized training provider. The move, following closely on the heels of the July 2014 acquisition of UK-based Partners in IT, continues to entrench Fruition Partners as the leading global provider of IT Transformation, Service Management and Cloud System Integrations. The combined company is ideally positioned for continued growth in the cloud professional services market, estimated to grow by $11.6 billion from 2013 to 2016, according to IDC Research. Commenting on the acquisition, Patrick Stonelake, co-founder and chief growth officer of Fruition Partners, said: “Fruition Partners continues to realise the market potential in the global cloud professional services market and actively looks for the right partnership and acquisition opportunities. As a leading player in the Canadian management consulting and ServiceNow market, Manta Group represents the ideal qualities that we are seeking in a partner: financial strength, solid growth, incredible people, breadth and depth-of-experience in IT transformation, ServiceNow expertise, a similar entrepreneurial and innovative culture, and an extensive list of blue-chip customer relationships.” The acquisition adds additional skilled employees to Fruition’s global roster of over 300, including ServiceNow technical resources, management consultants, and experts in financial services and other industries. Also, Current and future clients will gain access to Manta Group’s and Fruition Partners’ shared R&D, management consulting expertise, training capabilities, implementation resources, and ServiceNow knowledge base. The Manta Group Limited, a management consulting company, focuses on optimising, transforming, and improving the performance of IT organisations. Fruition Partners, Inc. operates as a cloud service management company.

National Financial Partners Corp. (USA) acquired Michelsen Benefits Group, Inc. (USA)
Deal Size: Unspecified Industry: HR consulting Date: January 2015
NFP, a leading insurance broker and consultant that provides employee benefits, property & casualty, retirement, and individual insurance and wealth management solutions, has expanded its corporate benefits practice with the acquisition of Michelsen Benefits Group, Inc., or The Michelsen Group (TMG). The Charlotte, NC-based brokerage firm specialises in group benefits and has property and casualty insurance capabilities. The Michelsen Group was established to provide best-in-class consulting services to large companies with respect to their group benefits and to help them adapt to the changing healthcare landscape. The firm was founded in 2003 by father-son partners Jim and Sean Michelsen, both of whom will remain as senior management. Commenting on today’s announcement, Douglas W. Hammond, Chairman and Chief Executive Officer of NFP, said, “The Michelsen Group is well respected in the Charlotte region, with a strong staff of experienced industry leaders. We are pleased to welcome Jim, Sean and the rest of their team to the NFP family.” Michelsen Benefits Group, Inc. offers insurance brokerage and consulting services. National Financial Partners Corp., together with its subsidiaries, provides advisory and brokerage services to corporate and high net worth individual clients in the United States and Canada. Continue reading

Which of your revenue streams are the most valuable to a buyer?

revenue streams croppedRevenue may seem like a straightforward topic; what could be easier than adding up revenue? But the truth is that not all revenue is created equal. In the first blog in this series looking at consultancy financials, we outlined the profile of a healthy consulting business. In this blog we’re taking a closer look at the different components of the revenue line.

On the topic of scale: while buyers of consulting firms have told us that size is important, it can be trumped by other factors. Above a certain size, what scale indicates to a buyer is that you’ve found a valuable service offering and a method of selling it. Furthermore, a strong growth trajectory will trump revenue scale in most situations. Most buyers would prefer a high-growth $9,000,000 business over a flat $19,000,000 one because they would assume the faster growing business has a more valuable offering in the market. It will probably be easier to scale within their operation too.

So now to revenue. We said that it’s not all created equal, but what did we mean by this? Let’s take a look at the different characteristics of revenue:

  • Recurring revenue: this is revenue that repeats each year in a very predictable way. This is extremely valuable as it reduces the need to sell each year to hit budget. Recurring revenue could come from a long-term contract or project, or it could be in the form of an outsourcing contract that lasts multiple years
  • New client service revenue: This is a critical component as it represents new market adoption of your offering. But it is by definition new selling every year and so viewed as higher risk and, if it is a significant part of the future forecast, it could potentially drive a higher earn-out
  • Existing client service revenue: This is easier to sell since a strong client relationship can support the sale of several projects over multiple years
  • Product revenue: These are things such as training materials, software etc. and are usually seen as a follow-on sale to the core offering
  • Reimbursed expenses: Expense reimbursements sometimes come with a small markup depending on the contract terms with the client, but are not normally seen as valuable revenue

So as you can see, some types of revenue are more important to a business and more appealing to a potential buyer. For an owner considering a sale, it’s important to clearly quantify the different kinds of revenue in your business and understand how they will be viewed by the buyer community. High growth businesses with significant recurring revenue can be more attractive than purely service consultancies that have to sell the entire revenue each year.

Fundamentally, buyers of your business will value two things about your revenue: How easy it will be to scale within their organization, and how much risk there is that it won’t work. Of course, other factors must also be taken into account, such as sector focus, geographic reach, business model and margin, so it’s never as simple as this! If you’re interested in finding out more about how to grow and sell your consulting firm you can download our quick guide here.

Our third blog in this series of consultancy financials will be looking at the different kinds of margins and how they affect value.

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Consulting firm M&A market intelligence on cyber security

Cyber security cropped

Cyber security never seems to be far from the news these days. Whether it’s the attacks on Sony or President Obama’s rally for increased cyber security legislation (just before accounts belonging to the US Central Command were targeted), the ubiquity with which we hear about this topic demonstrates how important it is to our lives.

As consumers, we’re becoming increasingly reliant on technologies such as smartphones and social media. Organizations are also becoming more dependent on their data for operational and strategic management. With datacentres split across continents and storage of data increasing in the cloud, personal and company information is also becoming increasingly exposed to cyber threats.

In response to these dangers, businesses of all sizes need help improving and strengthening IT security systems, and cyber security consulting services are increasingly in demand.

Innovation in this space is critical, as threats often evolve more rapidly in the cyber sector than the pace of solutions. This can in turn drive acquisition activity in cyber, as larger firms look to acquire skills and intellectual property (IP) rather than refreshing or building these in-house, which can often take longer.

In line with this, in 2013-2014 we have seen deal volumes of firms being acquired in cyber security consulting growing at over 20% per year, well ahead of the global IT consulting sector which saw growth of just under 10%.

Specific drivers of this M&A demand include the following:

  • Innovation driven by small-scale firms offering niche cyber security services and products. As they gain market share they become attractive targets to larger cumbersome corporates
  • As businesses become ever more connected, often through less secure devices such as mobile phones, the amount of damage cyber threats can cause increases. Threats include potential loss of IP, reputation and customers
  • Regulations and standards relating to individual privacy and data privacy are increasing as the public becomes more aware of data scandals
  • Global adoption of poorly secured cloud-based IT services has made cyber attacks more attractive. As companies move critical business data from more secure in-house databases to cloud-based networks, businesses must try and defend themselves against attacks

We’ve analyzed transaction data from 2006 to understand who have been the key buyers of cyber security consultancies, as this trend has evolved:

  • IT and research consulting firms have been prolific buyers over this period, with IBM, All Covered Inc. and CGI Group among the top
  • Technology firms, including IT software, hardware, data processing, internet service firms and IT distributors have also been consolidating this market. Frequent buyers of cyber consultancies in this group include CA Technologies and Dell.
  • Private equity firms are typically frequent buyers in growing market sectors such as cyber. Within cyber consultancies, we have seen Providence Equity Partners, Apax Partners and Thomas H. Lee Partners making several acquisitions in this space.
  • Beyond these key buyer groups, we also have seen telecom firms making cyber consulting acquisitions as Voice over Internet Protocol (VoIP) has driven the industry towards digital technology. Industrial and manufacturing firms have also been acquiring cyber consultancies, as front-end sales and back-end supply chain processes are becoming increasingly dependent on data and online systems.

Geographically, acquisition activity in the cyber security consulting market has been gaining significant momentum since 2011 in both the US and UK. The UK cyber security consulting sector is currently growing faster than in the US, but the US sector is larger and more mature. Within cyber, Identity and Access Management (IAM), data loss prevention and recovery, device management, and encryption are key areas of focus.

The importance of cyber security skills and IP to tech-related and non-tech sectors is likely to continue going forward, and we expect this acquisition trend, particularly for consultancies with cyber skills, to continue in 2015.

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Consulting Sector M&A Deals for week beginning 12th January

businessman doing handstand on the beachenChoice, Inc. (USA) acquired Foster Consulting Group, Inc. (USA)
Deal Size: Unspecified Industry: IT consulting Date: January 2015
enChoice®, Inc. announced the acquisition of enterprise report management (ERM) consulting firm Foster Consulting Group, Inc. (FCG). This acquisition, which includes all aspects of FCG’s intellectual property, customers, contracts and personnel, further strengthens enChoice’s leadership position and market share in the enterprise content management (ECM) space. FCG has provided consulting, design, integration and data extraction services for large, MVS-based ERM systems for twenty years. The company leverages custom data extraction tools to quickly and accurately extract ERM system data. FCG has helped hundreds of leading companies architect, monitor, tune and maintain their ERM environments. enChoice and FCG will offer their full product and services portfolios across their entire customer base. This will allow customers to maximise efficiency and ROI by providing a comprehensive, end-to-end spectrum of ERM and ECM solutions. The acquisition specifically benefits FCG customers by enabling them to take advantage of enChoice customer support resources and complementary ECM software and services. “The acquisition of FCG is a significant step forward towards broadening our offerings and capabilities in the ERM market,” said Tony White, CEO, enChoice. “We’re already the leading IBM® Content Manager OnDemand (CMOD) business partner and recognised worldwide supplier of CMOD education. With FCG, we further deepen our expertise and offerings in the strategic ERM segment.” enChoice, Inc. deploys, supports, administers, maintains, and protects end-to-end enterprise content management solutions and services. Foster Consulting Group, Inc. offers consulting, design, integration and data extraction services for large, MVS-based ERM systems and also develops related software products.

RLJ Equity Partners, LLC (USA) acquired Phase One Consulting Group, Inc. (USA)
Deal Size: Unspecified Industry: IT consulting Date: January 2015
RLJ Equity Partners, LLC, an affiliate of The RLJ Companies, announced its acquisition of Phase One Consulting Group, LLC, a premier provider of information technology-based consulting services and solutions to various U.S. federal civilian agencies. Founded in 1997 and headquartered in Alexandria, Virginia, Phase One provides a range of strategic solutions addressing IT strategy, organisational transformation, strategic communications, process and business analysis, solution architecture and engineering, agile development, and cybersecurity. Phase One Consulting Group has a long-standing reputation as a trustworthy resource for its work across a broad spectrum of federal agency and industry clients,” said RLJ Equity Partner’s Managing Partner Rufus H. Rivers. “RLJ is excited to support the company as it continues to develop innovative solutions to meet the needs of its private and public sector clients.” Phase One maintains long-standing client relationships throughout most of the federal civilian sector. Phase One typically interfaces directly with Chief Information Officers, engaging in every phase of the IT project lifecycle and supports its clients with strategic and tactical modernisation initiatives, including the utilisation of Platform-as-a-Service (“PaaS”) for migration to the cloud. Phase One Consulting Group, Inc. provides IT strategy, organisational transformation, process and business analysis, investment management, solution architecture, solution engineering, agile development, and cyber security solutions. RLJ Equity Partners, LLC is the private equity and venture capital arm of The RLJ Companies specialising in middle market, traditional buyouts, recapitalisations, add-on acquisitions, growth capital, and growth equity.

CohnReznick LLP (USA) entered into a letter of intent to acquire NOI Strategies, LLC (USA)
Deal Size: Unspecified Industry: Business consulting Date: January 2015
CohnReznick LLP, one of the top accounting, tax, and advisory firms in the U.S., announced it has signed a letter of intent to acquire NOI Strategies (NOI), a premier, global real estate consulting boutique. The deal is expected to close February 1, 2015. The NOI team will join the advisory services arm of the Firm and will operate as NOI Strategies, a division of CohnReznick. The combination brings additional service offerings and strategic synergies to both firms that will significantly augment the way they serve clients within the commercial real estate industry and beyond. Founded in 2003, NOI is a global services company that provides strategy, operations, technology, and outsourcing services to commercial real estate owners, operators and investors. The company maintains a presence in Chicago; New York; Dallas; British Columbia, Canada; and Sydney, Australia. “CohnReznick’s robust advisory services as well as its traditional accounting and tax services are an exciting complement to the platform for NOI,” Huang said in the press release. “As we continue to design customised solutions from both inside and outside the commercial real estate industry, we sought a partner that would help us expand our platform, augment our resources, and contribute new ideas and best practices from their broad industry experience.” NOI Strategies, LLC. offers management consulting, technology solutions, and operational support services to the real estate industry. CohnReznick LLP provides accounting and consultancy services through its subsidiaries to construction, distribution, entertainment, hospitality, real estate, and manufacturing sectors. Continue reading

What’s the point of knowing the value of your firm?

Point of valuation - value price cropped

Occasionally we encounter owners of consulting firms who believe that developing a simulated valuation of their business is a meaningless exercise before taking their firm to market. Their position is that the only valuation that counts is whatever a buyer is prepared to pay.

We agree that the actual price paid in the transaction is indeed the only one that counts! However without a simulated valuation in advance, the price paid is more likely to be lower than it could have been. Or there could even be no sale at all because you entered a process wanting far more than the hungriest buyer would ever be prepared to pay.

So how is it possible to produce a credible simulated valuation and why does it matter?

Every firm we take to market starts with a valuation exercise that gives us a range – the worst case, best case and most likely outcome. We can do this because we know the M&A market for consulting firms and have a tried and tested methodology which looks at a business through the lens of the buyer.

It takes into account the financial performance, forecast and risk in the business, as well as the market conditions and prices comparable consultancies have achieved. We’re able to factor in the likely synergy value to the buyer groups that should be interested and the potential effect of buyers competing for your firm (depending on how hot your consulting sector or discipline is).

Now armed with a valuation, what are the benefits to you as a seller?

  1. By modeling the valuation range, we can identify where short term value enhancements can be made. If these weren’t addressed the sale price could be reduced before or during due diligence. As everyone wants to sell their business for the best price, it makes sense to get the business in the best possible shape before going to market.
  2. The development of the valuation provides good input to the strategy adopted in the sales process which increases the chances of taking the price up to a premium level or beyond.
  3. If you don’t have a view of the value of your business before you enter a sale process, you don’t know what good or bad looks like. Do you want the nagging feeling that you undersold your business when you later see competitors do exceptional deals? It could also be that you fail to strike a deal because of an inflated or unrealistic expectation.

As you can see in our annual M&A Report, the ‘typical’ firm sells for approximately one times its revenue. However every average comes with a range and in the consulting sector it’s a very wide range (anywhere between half and three times your revenue).

If you want to be towards the premium end of that range and achieve the best price for your consultancy, it’s important to be aware of what the market is likely to pay. By understanding the value of your business and remedying any weaknesses prior to going to market, you’re more likely to achieve a price that you’ll be delighted with.

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Consulting Sector M&A Deals for week beginning 5th January

businessman doing handstand on the beachWipfli LLP (USA) acquired Elko & Associates Ltd. (USA)
Deal Size: Unspecified Industry: Financial Advisory Date: January 2015
Wipfli LLP, one of the top 25 accounting and consulting firms in the United States, announced that Elko & Associates, Ltd. (Elko) joined the firm effective December 31. Elko, a firm headquartered in Philadelphia, Pennsylvania, provides audit, tax and consulting services to businesses and individuals in the north-eastern United States. “We’ve been searching for an exceptional firm to merge with in the Northeastern United States to expand our firm into that area of the country and found Elko. We are thrilled to be combining with a well-respected firm that has such a strong reputation for helping businesses succeed and technical excellence,” said Rick Dreher, managing partner of Wipfli LLP. “We look forward to moving into 2015 together as one firm.” Michael Pozielli, managing director of Elko, commented, “Elko is very proud of our 54-year history serving Northeastern businesses and individuals and giving back to our community. We are excited to join a firm with a similar client service philosophy and similar values. This combination with Wipfli is a positive development for our clients and our associates. For our clients, it will broaden and deepen the specialised services and industry-focused solutions we are able to provide, allowing us to continue to meet their needs as they grow and face new challenges in the years ahead. For our associates, the combination will provide advanced training opportunities and increased career opportunities with a larger firm.” Elko & Associates Ltd. provides professional accounting, auditing, tax and business consulting services. Wipfli LLP provides accounting and business consulting services.

Wipfli LLP (USA) acquired Galusha Higgins & Galusha, PC (USA)
Deal Size: Unspecified Industry: Financial Advisory Date: January 2015
Wipfli LLP, one of the top 25 accounting and consulting firms in the United States, announced that Galusha, Higgins & Galusha, PC (GHG) will join the firm effective December 31. GHG, a firm headquartered in Helena, Montana, provides audit, tax and consulting services to businesses and individuals in the Northwestern United States. This is the third acquisition for Wipfli within a year and marks the second acquisition for the firm in two months. “GHG has a 95-year heritage and strong reputation for providing high-quality services to businesses in the Northwest. This combination will strengthen and expand Wipfli’s physical presence in that area of the country, bringing a more diverse set of services to the Washington market where the firm currently has an office, while also adding highly experienced professionals to the Wipfli team,” said Rick Dreher, managing partner of Wipfli LLP. Wipfli LLP provides accounting and business consulting services.

Gemini Corp. (Canada) acquired Arletta Environmental Consulting Inc. (Canada)
Deal Size: $2.5 million Industry: Environmental consulting Date: January 2015
Gemini Corporation is pleased to announce that it has acquired all of the issued and outstanding shares of Arletta Environmental Consulting Inc., a privately held environmental consulting firm servicing oil and gas clients in Alberta and Saskatchewan. Arletta, established in 2008 in Calgary, Alberta, employs 20 skilled professionals specialising in environmental, remediation and reclamation services. The Arletta team has the experience and talent to complete environmental project requirements by supporting all aspects from pre-construction assessments, ground water monitoring, and permit applications, to spill response, remediation and reclamation. “The unique business model we developed is now well-positioned for growth with the acquisition of Arletta, which has been delivering exceptional services and has developed strong relationships within the oil & gas industry.” said Doug Lautermilch, Gemini’s President and CEO. “We will now focus on the tremendous opportunity to accelerate our growth with the integration of the expertise of professionals from three organizations and leverage our collective client relationships.” Gemini Corporation, a professional services company, is engaged in designing, building, and maintaining energy and industrial facilities in Western Canada and internationally. It operates in two segments, Field Solutions and Engineered Solutions. The Field Solutions segment provides engineering, construction, fabrication, and maintenance services. The Engineered Solutions segment offers engineering, procurement, and project management services. Continue reading

Financial profile of a healthy consulting business

Profile of a healthy consulting business

By David Jorgenson, CEO at Equiteq. 

Equiteq has analyzed thousands of consulting and professional services firms over the past decade. In fact we recently conducted research with the buyers of consulting firms to find out what they look for when buying consultancy firms. Although there is a wide range of buyer requirements, the most popular criteria for buyers was found to be consulting firms with revenues between $15m and $40m, stable financials, deep domain expertise and leverageable intellectual property.

Through our work and research we have gained a unique perspective on the financial metrics of consulting firms. These are important for firm owners to understand while they are growing their businesses and when it’s time to sell. This series will look at the important metrics, with the first exploring what a healthy consulting business looks like.

Below is a chart showing our view of the financial profile of a successful consulting firm. This is a general view and individual consultancies may vary.

Equiteq’s model profile

model graph

The first bar of 100% represents total revenue. The key thing to note is that not all revenue is created equal. We’re sure you have your own views on what types of engagements are better for your business, such as being more profitable or helping to add a more strategic string to your bow. Buyers will have their own views on the most valuable engagements and these can be a key driver of price in a sale process. We’ll go into more detail on revenue in the next blog of this series.

The 50% bar in this chart can either represent delivery cost, or its exact inverse – gross margin. This means that healthy consulting businesses have at least 50% margin after all the costs of delivering services are paid. Importantly, this does not mean that all partner costs need to be paid as part of this 50%, because often we find consulting businesses aren’t allocating partner time appropriately to the next category of expenses.

The next category of expenses is admin or overhead costs, which are the costs of running the business. This segment should come in at around 30% of costs. As mentioned above, it is important to make sure that the accounting is accurate. For example, if a partner spends 40% of her time selling, then 40% of her salary needs to be in the overhead bucket. If not, analyzing the resulting metrics won’t provide the correct answer! We have found that allowing 30% to be spent on admin and overhead costs provides a reasonable balance between investing in growth while not overspending on central infrastructure.

The remainder is EBIT, or Earnings Before Interest and Tax. EBIT (or EBITDA) is the accounting profit that is available for distribution to the owners of the business. Accurately positioning the true profit of a business is the most important numerical topic when entering a sale process or negotiation, so we will dive into much more detail on the topic in a subsequent blog.

While we will go into further details about each of these factors in future blogs, it is important to have an overall view of what kind of balance there should be in a healthy consulting business. If revenue growth is high but gross margin is low, questions need to be asked about pricing, or utilization, or the accuracy of the management tools used to run the business. Equally important, if overheads are too low a consultancy may be missing out on growth opportunities which could impact its sale price in the future. By having an understanding of what the profile in a consultancy should look like, owners can take steps to remedy problems and set their business up for future success.