Different buyers look for different things when acquiring consultancies. Broadly, there are three different kinds of buyers: consulting buyers, corporate buyers and investment buyers. Each will see different aspects of your business as valuable and understanding their motivations is important. This week, we’re taking an in depth look at consulting buyers and will examine corporate and investment buyers in future pieces.
There are four key areas of consideration for consulting buyers which we will explore in turn.
- Build vs buy: Why consulting firms choose to acquire rather than grow a capability.
Growth is always on the agenda for most large and mid-market consulting firms. It typically comes down to balancing organic and acquisitive growth. Organic growth takes time and the careful management of demand and supply in the new area. There is the potential risk that the payoff takes longer than expected or does not happen at all. The upside is that the firm is in control of its own growth and the pace is incremental. Acquisitive growth, if successful, is immediately additive. However there are well known statistics on the failures of M&As which are often the result of poor post-merger integration.
In practice, consulting buyers use a combination of organic and acquisitive growth. Sellers of consulting firms need to understand that buyers will always consider whether your business could be built internally for less money than it would cost to acquire your firm. It is worth asking yourself, “What am I actually selling?” as the buyer will be asking “What am I buying?” Therefore, you need to demonstrate that what you have is additive to them, rare in the market with valuable intellectual property (IP).
- Acquiring capabilities: What is the landscape of capabilities, services and expertise that consulting buyers typically consider?
Large, multi-disciplinary consultancies that are likely to acquire other firms tend to be organized by both capability and industry. The reality is that strategy firms have historically organized themselves by industry expertise and most others have done so by functional or disciplinary capabilities. The reason for this is that in order to provide sound strategic advice, strategy consultancies look holistically at business issues across functional disciplines and consider market dynamics within an industry.
The trick is to understand which consulting buyers will be more attracted by your focus areas (capability or industry) and less deterred by areas where you may be more generic. Ultimately, buyers are looking to pay fair market value for your firm, but gain above average returns from their investment. The way to do this is by making acquisitions that have a high degree of synergy potential with the existing business.
- Intellectual property: What is it and what value does it represent?
IP has always been a key consideration for consulting buyers, but is becoming increasingly important as the landscape changes. IP is difficult to define and even more difficult to value. So sellers often want to understand how to define IP, whether what they have developed as IP is valuable to buyers, and if so, what is it worth?
IP comes in many different forms. The most understood forms of IP are software or IT products/solutions that are directly revenue generating as a standalone asset. The most abstract forms tend to be methodologies or best practices that do not generate revenue, but better enable a consulting firm to sell their expertise in a repeatable and consistent fashion.
Ultimately, consulting buyers are looking to acquire IP that allows them to sell more, or higher value, consulting work.
- Post merger: What to expect from consulting buyers following an acquisition
It is well known that the main reason for most M&A failures is poor integration, including pre deal integration planning and post deal integration execution. The situation where a consulting firm is acquired by a buyer is even more sensitive to integration failure, as integrating people is both the most difficult aspect and also the key to its success.
Time and time again, the critical factor of integration has proven to be the alignment of leadership objectives and defining successful integration as accurately as possible. However, as the acquisition of consulting firms by buyers involves people based risks, such as attrition, most buyers mitigate this through a deferred payment or earn out in the deal structure, with upfront payment typically in the form of cash and shares (partnership with some consulting firms). However, there is an ongoing dilemma for most buyers – how to measure the performance of an earn-out to ensure the acquired firm continues to grow, while trying to take advantage of the synergies between the two firms that often make standalone earn-out metrics difficult to measure. Some firms get around this by using top line earn-out metrics such as revenue or gross profit, while others stick to earn-out metrics for an initial period until the growth and integration is proven, then work collectively with the target to adjust objectives and take advantage of the synergy opportunities.
Ultimately, the integration of consulting offerings and cross selling opportunities with clients commands most of the air time in integration discussions, as this is where the money is made and where the opportunity lies. However, consulting buyers more than others understand that a better than average alignment of people is required to make this happen.
Understanding the motivations of consulting buyers can help you position your business in a more attractive way. If you’d like to read more about what consultancy buyers look for please read the full article here.
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