To make the sales process as smooth as possible, it’s best that the buyer is not given any unwanted surprises. As the owner of one consultancy that you feel you know inside and out, it’s easy to forget that buyers may look at hundreds of potential acquisitions a year. Often at the first sign of something that concerns them they will simply move on to the next potential acquisition. To build their confidence and indicate to them that you are ready for a sale, there are several areas to consider.
There are a number of measures when it comes to financial performance that buyers will be scrutinizing carefully. Lack of revenue growth is one of the most important indicators, as this implies that there is not a demand for your services, you’re not good at selling your services, or there is no heat in the market. Buyers also look at gross margin – as this can be a proxy for whether clients are willing to pay the right price for services – and earnings before interest, tax, depreciation and amortization (EBITDA) of around 20%.
As a company grows it needs more money in the system to keep it going and that is why buyers also look for strong cash conversion. Spending too much on investment and borrowing to cover working capital is unlikely to appeal to buyers. Strong cash conversion and free cash flow means that a business is consistently generating profits that can be returned to the shareholders or invested in other ways in the business.
Generally speaking a firm needs revenues of around $7.5m, with a profit of $1.5m, to be considered viable from a buyer’s point of view. This is still very small and must provide exceptional synergy or intellectual property. Our Buyers Research for those looking to sell in 2016/17 showed that the target acquisition size for consulting firms over the next two to three years ranged between $18m and $45m in revenues, with an optimum size of $31m.
Fragmentation can come in many forms and is rarely appealing to buyers. Small consultancies dotted around the world pose a challenge for large companies to acquire as it makes the decision-making much more complicated.
Equally, fragmentation in the sector you operate in, or the diversity of services you offer, is unappealing. Buyers look for specialist expertise, as this is easier to integrate into their operations and scale.
However one aspect where buyers prefer fragmentation is the number of clients you have. Client concentration is a cause for alarm for buyers and a consultancy should never rely on just one client for 50% of its revenue.
People are of course hugely important in consultancies and there needs to be a plan in place if key people, such as sales or members of the management team, wish to leave on day 1 of the new organization. You must demonstrate that the capability of the business to generate profit when these people leave remains in the business.
Buyers will also be looking at the consultants versus associates mix. Different mixes will be appropriate in different sectors, but regardless of the sector, key relationships and knowledge should be held by the consultants in the business, rather than associates.
Finally, buyers look for deals that will run smoothly, as it takes a similar amount of time and investment to buy a $20m company as it does a $40m company. So if you’re wondering if you’re ready to exit and your consultancy has complicated tax affairs, complex group structures, aggressive accounting practices or property complications, then you’d be advised to address these before going to market.
If you are thinking of selling your consulting firm and would like to discuss your plans, please get in touch.
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