Lately, we’ve been running a series of free 30-minute webinars to help attendees grow the equity value in their consultancy firms and prepare for a sale of their business. Attendees at each webinar submit questions, and we’re going to be sharing and answering these questions in a series of blog posts. This week we’re looking at the first part of the Q&A session during the webinar on what your company’s sales and profit numbers say about how you run your business.
- What is more important in terms of growth – revenue or profit?
The answer is both! Ideally a buyer wants to see that an acquisition target can grow the top line while maintaining the profit margin at a healthy level (around 15% – 20% for most consultancies). Some consultancy buyers may pay closer attention to revenue growth, as this shows scalability of the business and post-acquisition, the profits will change as the target firm is integrated with the buyer’s business. However, profits are important as the key value indicator and if profits are declining, this may cast doubt on the way the firm is managed and whether the acquisition will be value-enhancing for the buyer in the short term.
Buyers are always looking to exploit potential synergy and scope for further growth, and they will ideally look for both revenue and profit growth as indications of market demand and good management respectively.
Ultimately, consultancy buyers are only interested in growing consultancies; one year of negative growth can set the clock back on the optimal time to sell the business.
Click here to find out which of your revenue streams are the most valuable to a buyer.
- What percentage of revenue should be allocated to marketing? Is there a cap?
It isn’t necessary to have a cap on marketing; however, every firm must learn to manage the amount of demand it wishes to create in line with its ability to deliver on the projects it wins.
For instance, if your firm is going through a period of high utilization and is working close to capacity, then you might want to hold back or slow down your marketing spend for future campaigns. The key is to do this without risking a dry pipeline once your capacity becomes free. Creating demand for services which you are then unable to deliver can be damaging for the business, so it’s important to balance your sales and marketing spend.
- Earn-outs are common when buyers acquire services firms. Can they be avoided?
It is true that earn-outs are very popular with services consultancy buyers. This is because these types of buyers usually aren’t buying transactional assets; they are buying people and their capabilities. The risk is that if all of the money is paid up front, owners and stakeholders can leave or become less motivated to continue to deliver. To alleviate this risk, buyers offer earn-outs.
Sometimes, to make the proposal more competitive, buyers would offer a differently balanced earn-out without increasing the value of the overall offer.
But, while earn-outs seem to be the norm, they are by no means absolute. It is not unusual for non-consulting buyers to acquire a consultancy outright.
The second half of the blog will be published in the coming weeks.
If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.
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