We’re pleased to bring you the results of our second annual Buyers Research. We commissioned an independent researcher to speak to over 100 consulting firm buyers across North America and Europe. The results provide valuable intelligence for both consulting firm owners with an eye on selling their firms at some point in the future, and consulting firm acquirers wishing to understand buying trends in the current market.
The research found that buyers’ acquisition expectations have more than doubled in the past year and there are huge amounts of capital set aside to enable these acquisitions. Within those spoken to for the research, there are over $7.7bn of funds available for the acquisition of over 400 firms in the next two to three years. This is an 11% increase from last year’s budgets and is encouraging given the continuing economic uncertainty we have seen over the past year.
When it comes to the size of consultancies most in demand, buyers are looking for larger firms than they were last year. On average the target acquisition size for the next two to three years ranges between $18m and $45m in revenues, with an optimum size of $31m. This reflects a 20% increase in size preference at the lower end and a 15% increase at the upper end. However, if you’re looking to sell your firm, it is important to recognize that the vast majority of consulting sector deals are consistently done at the smaller end of the market. Because of this, knowing the right buyers to approach can make the difference between success and failure when selling your firm.
Buyers are polarized in their use of qualitative and quantitative measures when evaluating acquisition opportunities in consulting. Quantitatively, buyers prioritize margins and growth above all other metrics. Qualitatively, buyers focus in on your client base and quality of your intellectual property (IP). A deep understanding of what buyers are looking for will allow you to tailor your approach accordingly.
IP continues to be of paramount importance for buyers, as 68% of all buyers cited IP as being extremely or very important as a factor when assessing potential acquisition targets. When considering the different types of IP, buyers prefer IP that directly generates revenue, or that supports the delivery or standardization of a target firm’s consulting services. While IP plays a key role in buyers’ consideration of consulting firms, consulting firm owners need to draw a clear line between their IP and the real value it creates for the firm. Forty-five per cent of all buyers found it difficult to understand how the IP in the target firm contributes to the success of those. If you’d like to learn more about this, please view our webinar on how to build IP which will grab a buyers’ attention here.
Earn-outs continue to be a reality for the majority of consulting sector transactions. The ‘average’ deal will include 45% in up-front cash, with the rest over a period of 2.7 years; 83% of buyers measure earn out performance on gross margin, but measures range from partner retention to net profit performance. There is a wide range of ways that deals can be structured and a lot at stake, so the need for good negotiation skills is critical to get the best deal for you and your business.
Finally, once the champagne cork is popped and the focus turns to integrating an acquired consulting firm, the survey found that buyers tend most often to focus on the integration of people above all else in the first 90 days post deal. This is due to the fact that human capital is the real asset of a consulting firm. As any acquisition is a disruptive time for a seller, buyers are keen to ensure their assets don’t walk out the door during or immediately after an acquisition. Following the integration of people, clients are the next highly prioritized area and the more mechanical integration of technology and systems follows on from these. How long do integrations typically last? On average, as a seller of a consulting firm you can expect to be involved in an integration period for just under two years following an acquisition. Buyers start thinking about how a seller’s services will integrate with their own early on, although it is also critical for sellers to consider how integration into a buyer’s firm will impact the firms culture and its ability to retain the attributes that make it successful.
When selling your firm, knowledge of buyers in the market is critical. The more informed you are about buying behaviour and preferences in the market, the better equipped you will be to navigate through to a successful sale.
To read more detail about the findings from the research you can access the full report here.
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