During a sell-side process, it is natural to focus on the factors that most attract buyers and attributes that make your firm a good strategic or financial investment. However, it is also important to understand the often pessimistic perspective from the other side of the table – the buyers.
Why? Active acquirers look at hundreds of acquisition opportunities every year. The first time a potential buyer looks at your firm as an acquisition opportunity, they are likely to try to justify a quick “no” to move quickly though their pipeline of potential deals.
Our research and experience has identified the three top factors which deter buyers of consulting firms. Some of them can take years to address, so early identification is key.
1. Poor cultural fit
A poor cultural fit is most likely to deter buyers from making an acquisition. Prolific buyers (those who buy more than one firm a year) in particular recognize the wide variety of integration challenges that most acquisitions present and that stand in the way of the expected benefits.
Cultural fit is a critical factor in realizing the full synergy value of an acquisition, as this is not simply a mechanical integration task. It always involves people from different firms working together toward a common purpose. This is especially true of acquisitions in the consulting sector, where people are the bulk of the assets and in which cultural synergy is highly sensitized.
Unlike other red flags mentioned in this blog, culture is not something that should be tampered with as part of a transaction. Culture is often inherent in a firm. It is significantly influenced by a firm’s leadership and typically lies at the heart of the firm’s success or failure.
2. Diversity of service offerings
For a consulting firm, a strategy of building and maintaining a wide spectrum of services can be a strategy of responding to and profiting from a variety of client issues. However, if you are looking to sell your firm, buyers may not view this positively. From a buyer’s point of view, a broad set of services may dilute their perception of value, as they may see less focus and domain expertise in any one service area, which is an aspect that buyers are in fact most attracted to.
3. Good profits, but no growth
There are often different choices made when operating your firm for sale versus operating for growth. For instance, a growth-focused firm may have the appetite and flexibility to make investments today that consume capital and impact revenue and profits, with the expectation of payoff in improved revenue and/or profits in the future. In contrast, a firm looking to sell will want to show a historic track record of growth and, at the time of going to market, be in a steady growth state with good profit margins. This sets a historic precedent for the forecast future revenues and profits, on which buyers base a value. As such, a firm should ideally sell when prior investments have begun to pay off, as opposed to making new significant investments just before a sale that may temporarily impact revenue and/or profits. Doing this will break the track record of growth that sets the precedent for its future trajectory.
This is important as buyers effectively acquire ownership of a firm’s future profits or cash flows. However, even if a firm is profitable today, buyers will be deterred if there is no precedent for and/or planned future growth.
By identifying the areas that may deter buyers early on, you will be in a position to address these prior to any future sale process. And by addressing these key issues early on, you will maximize the chance of gaining full value should you one day want to sell your consultancy.