Advancing technologies and cloud computing, a maturing millennial generation and the rise of the ‘gig economy’ are creating an environment where consulting businesses are increasingly looking beyond the traditional employed model toward more flexible employee solutions.
This way of working suits consultancies, but they need to consider how it affects the equity value of their company.
Does a stigma still exist in the minds of buyers of knowledge-intensive firms when considering an acquisition? Potential suitors may view a more traditional, fully staffed model as more attractive for reasons of consistency, continuity and a deeper entrenchment of brand values and culture. However, these characteristics and contract working are not mutually exclusive.
There is no doubt that leadership and management in any organization is critical to building business value, but did you know that it’s also a focus of most consultancy buyers’ due diligence when considering a purchase?
How do you manage the potential conflict of building the profiles and skills of managers to attract a buyer when these managers may want to leave after a sale?
The focus of buyers during due diligence is on the top two levels of leadership in the business – the board leadership and the business unit leadership. Managers at this level are often required to stay with the new firm for a period after sale.
If your managers are intrinsically involved in every significant operational activity, then a buyer would be reluctant to see them exit. But if a manager’s responsibility is easily transferable, then there is a greater chance of a buyer allowing a manager to move on.
If you’re a business owner who wants to exit immediately after selling, rather than staying in the business during an earn-out period, you need to make yourself superfluous to the day-to-day running of the business before entering into the sale process.
By Jason Parks, Director – Strategic Advisory Services, Equiteq.
Gross margin is an important metric in consulting organizations. It can be the difference between steady growth, and running to keep the lights on. It’s also one of the key metrics potential consulting firm buyers focus on as they look to acquire firms with strong profitability.
We recommend that gross margin should represent 50% of a firm’s revenue. If it’s less than that then you’re unlikely to be generating the funds needed for growth or delivering a net margin that will drive equity value.
The challenge with improving gross margins lies in the fact that they rarely have a singular root cause.
There are three main areas to focus on to improve profitability in a consulting or professional services firm, and they are all intertwined:
Increase revenues generated by the business by selling higher value work
Improve the leverage structure of the delivery organization (i.e., people, IP, QA)
In November, we continued to observe strong deal activity amongst prolific IT services buyers such as Accenture, Cognizant and CGI Group. This month’s sale of AlixPartners by CVC Capital Partners also marked one of the largest private equity exits within the consulting industry. With respect to equity market performance, U.S.-based listed consultants tracked within the Equiteq Consulting Share Price Index have rallied following the Presidential election result. This is expected to be reflective of hopes amongst many investors of an improved business outlook in the U.S. stemming from future fiscal stimulus plans, corporate tax rate reductions and regulatory reforms.
CVC Capital Partners agreed to sell its stake in AlixPartners to company founder Jay Alix, as well as to investment firms: Caisse de dépôt et placement du Québec, Public Sector Pension Investment Board and Investcorp Group. The deal values AlixPartners at over $2.5bn and implies a current year revenue multiple of approximately 2.5x.
Marc Jantzen is the former Chief Executive of performance improvement and training consultancy Blue Sky. We recently held a webinar where he shared the lessons he learned from selling his business to Capita and answered attendees’ questions on what it was like.
How do you know if your business is ready to be sold? Do you sell when there is no growth / when you’ve reached saturation?
While the reasons for selling are always personal, it is unlikely that you’d find a suitable buyer if the business appears to be stagnating. Buyers are purchasing the future potential of a business to grow and generate profits.
So, if your consultancy isn’t growing, it is important to identify the cause and perhaps bring in advisors, like Equiteq, to help your business develop a growth plan that gets you in shape and ready for sale.
Click here to read a post from Paul Collins, Chairman of the Board of Directors at Equiteq, on the right time to sell.