Ramone Param, Associate Director, Equiteq recently led a webinar looking at how to attract the type of buyer that best aligns with a seller’s business strategy and future growth trajectory.
In the consulting sector, the majority of deals are undertaken by strategic buyers. One of the most prolific buyers, Accenture, completed seven deals in Q3 2017 alone. The involvement of private equity firms in the consulting sector has traditionally been cyclical, although recently there are many actively acquiring private equity investors within the sector.
When considering a sale, it is important to understand the differences in the way these two buyer groups approach transactions to ensure you are partnering with a buyer whose business strategy aligns with yours.
Strategic buyers are non-private equity investors with existing businesses looking to fund an acquisition as part of their existing operations. They are typically focused on enabling revenue growth synergies as part of their acquisition of a consulting firm.
Private equity buyers are firms investing private capital into businesses that demonstrate standalone growth, stability and high profit margins. This capital is leveraged to grow the company with the aim of selling it at a profit. In contrast, strategic buyers look to an acquisition in their pursuit of synergy opportunities.
Important considerations for selling your business
Both private equity and strategic buyers consider a combination of qualitative and quantitative metrics when evaluating a business’s worthiness for an acquisition.
Given private equity firms’ objective to invest in a consulting firm for profit, there is a greater focus on quantitative metrics such as profit margins, growth rates, gross margins revenue per employee and employee utilization rates. Findings from our 2017 Buyers Research Survey show that for buyers, attractive firms are those growing by at least 7% per year. For private equity firms, these metrics are used to form projections which feed their returns models and generate an assessment on the likelihood of cash returns from a business.
In contrast, strategic buyers place greater value on qualitative metrics such as cultural fit, quality of client base, range of crossing-selling opportunities and value of intellectual property (IP). Notably, our 2017 Buyers Research Survey revealed that over 70% of targets do not make their IP optimally apparent to buyers. For strategic buyers, having the right culture fit is important in enabling better collaboration, which is integral to improving the revenue growth synergies of the partnership.
Depending on the seller’s business goals, the type of buyer they partner with has a significant impact on the strategic opportunities available to them. For example, partnering with private equity buyers affords the seller the opportunity to enter new markets and geographies, guided by expert advice and unique market access to help achieve desired market penetration.
Assessing the types of offers for your business
Depending on whether a consulting business owner is looking to remain with the business, or is seeking a definitive exit in the short term, partnering with a private equity or strategic buyer is an important consideration.
Traditionally, strategic buyers offer a majority buyout, structured with a combination of cash up front, fixed different payments and earn outs. For owners looking for a definitive exit, a partnership with a strategic investor is the most appropriate option.
For owners looking to remain with the business, selling to a private equity investor will enable you to retain equity in the business and benefit from increased profit when the private equity investor sells its ownership in the future.
Ultimately, it is important to understand how different buyers approach transactions to ensure you are partnering with a buyer whose business strategy aligns with yours.
Listen again to the full webinar for intelligence on attracting the right buyer for your business.
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