Over the years, Equiteq has worked with many entrepreneurial owners of consulting firms to help them grow value and sell their businesses. However, from experience we see that only a fraction of consultancies grow to a saleable scale. In this blog, we’ll explore some of the mistakes leaders make that affect their success.
- Working IN, not ON the business – Particularly for early stage firms below $5m revenue size, this is a common reason why businesses fail to scale. Business owners should recognize whether they are spending too much time delivering for clients, as opposed to delegating and working to lead the growth of the business.
- Innovation distractions – Ultra-entrepreneurial leaders can get into the habit of spotting new ideas and innovations that promise to bring in millions to their firms, but often just suck resources out of the core business. Think: Will this new idea add leverage to the core service? Will potential buyers be interested in these assets together or is it worth considering launching a separate venture that does not distract?
- Value negative diversification – It is important to scale up while also remaining attractive to potential buyers. Diversifying and growing into different markets or verticals can dilute the focus of the company and its niche. Because buyers are often interested in specialized firms, business leaders should contemplate whether the company’s focus is spread too thinly and if a buyer will be interested in all of their business – if not, the business may be growing in a value negative way.
For more on the equity value risks in international office expansion, click here.
- Failing to professionalize the business – A business made up of very smart people who generate work by network selling may make a lot of money, but may have very little value and be hard to scale. Unfortunately, many owners can be slow to introduce the necessary cogs in the machine needed to guarantee future growth. Buyers are only interested in organizations with high potential to grow, but there isn’t any value in a company that relies too heavily on a small set of highly skilled individuals. When you come to sell the business, it is the demonstrable evidence of these disciplines and business constructs that will enable the buyer to place a value on your company.
- Misunderstandings of valuation – Consultancy owners sometimes mistakenly assume that their business is both valuable and sellable when buyers approach them speculatively. In the real world, poor knowledge on value often results in premature, bad, or failed deals. If you don’t know the realistic current value of your company, how do you know what good or bad looks like when decisions are to be made?
- Lack of a plan to become ‘sale ready’ – Sale readiness has two meanings: firstly, that the business is at a stage where it has reached the desired value and, secondly, that it is well prepared for a transaction. If the plan is to grow to $20m and exit in three years, then it is important to bear in mind that, though, the target of $20m might have been met, there might still be a high risk in completing a successful transaction. A lot can go wrong in the six-to-nine month transaction period.
- Inadequate shareholder alignment on exit strategy – If you are not the sole shareholder, then other shareholders will have their unique needs and goals. If these goals are too diverse, then growth may be held back, or a potential sale may be hindered.
- The Johari Window mistake – Supreme confidence is a valuable thing. While entrepreneurial achievements deserve all the hard-won kudos and respect earned, does this mean you don’t need to take advice on value growth and selling your company? Savvy owners that avoid this mistake build into their plans that they ‘don’t know what they don’t know’. They build a support structure around them to ensure that hazards are foreseen during value growth and that there is a high probability of a successful transaction when the company sells. So hire an advisor; if not Equiteq, then someone else.
If you’d like to read more about entrepreneurs’ eight biggest mistakes in building a sale ready consulting business, please read the full article here.
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