Making a success of succession

How do you ensure a succession plan works? When should you start considering succession planning? Penny de Valk, Equiteq specialist in leadership development and human capital, addressed these and other front-of-mind questions of business owners in the Q&A of our recent succession webinar.

The main issues raised included:

  • Recruiting new leaders: internal versus external
  • Sharing equity to attract and engage
  • Handling founders’ syndrome and the exit transition

What do you see as the pros and cons of appointing a CEO from within the firm compared with recruiting from outside?

There’s no right or wrong here. With an internal candidate you get someone who is steeped in the values and the market, someone who really understands the organization. That can have huge advantages, but if you are looking for exponential growth, or a shift in thinking, it may be best to recruit externally. It is important to begin with what you need, really spend time on ‘what good looks like’ then assess your existing people against this. You can spot the potential inside and develop it. You find people from within the business who are just as ambitious and are just as visionary about what the organization could be, not just what the organization was.

The rule of thumb would be: for organizations that are not in true start-up mode, but are half way through their maturity, it is probably half and half. The important thing is there is a good mix of capability, experience and potential.

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A practical guide to improving margins

We recently ran two 30-minute webinars on putting margins at the centre of your business. The first of these outlined the steps businesses must take to improve margins which you can view here, while the second was a more specific look at how to implement these steps in order to improve margins in a sustainable way which you can view here. This week, we’re looking at some of the questions asked during the second webinar.

Our sales leaders are all about closing the deal and trying to increase the size of the deal. But our delivery staff are often challenged to translate that into the expected profits, can you comment on that?

When we look at the root causes of problems with margins, it’s often the lack of collaboration between sales and delivery. We commonly find this lack of collaboration can result in delivery managers discovering deals aren’t scoped properly, or the wrong skillsets were assigned.

It’s therefore important that delivery managers have early visibility of the pipeline to get resources lined up for the right client and at the right rates. That can only happen if there’s collaboration, and with both sales and delivery having access to the same information.

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Could you enhance your business valuation by embracing AI?

Artificial intelligence (AI) is no longer the domain of science fiction. Instead, it’s rapidly becoming a dominant force in the Fourth Industrial Revolution – that of digital transformation.

It’s likely that many owners of knowledge-intensive services businesses, such as IT services, media and marketing agencies or consulting firms, will be considering how AI fits into their strategy.

Further, those looking to sell their business in the future would do well to consider how AI might enhance their market position. Buyers are increasingly interested in acquiring knowledge-intensive businesses with these capabilities, which means those demonstrating the foresight to embrace AI sooner rather than later could expect to command a premium valuation.

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Key considerations when designing incentive schemes to support exit success

By Penny de Valk, Associate Director, Equiteq.

Knowledge-intensive services firms can achieve faster growth and reduce founder dependency through diversifying management roles, smart succession planning and equity incentive schemes. These steps support higher future exit values, better deal structures and increase the likelihood of achieving earn out targets if key people are retained and share in the earn out.

From the founder’s point of view, introducing equity incentives will probably be one of the largest investments the company makes so it’s really important to get this right.

Too often tax planning takes crowds out the more important process of designing a commercially effective scheme. Tax is important, but an approach that ensures the growth and exit vision is aligned by evaluating how much value to share, with who and over what time period should come first.

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How focusing on millennials and business culture can drive equity value

By Penny de Valk, Associate Director, Equiteq

It’s now well established that millennials are changing the nature of the workplace and businesses need to respond. However, the extent to which millennials are influencing M&A activity – as well as how creating a culture in which millennials can thrive can drive equity value – is yet to receive the same level of recognition.

The importance of millennial views when it comes to M&A was underlined most recently by research from the consultancy EY. This found that almost three quarters (74%) of senior executives consider millennial attitudes and preferences when making M&A decisions.

With millennials a growing section of the workforce, they could be set to influence M&A activity further still. Those organizations that meet their needs and earn their loyalty will become more attractive to prospective buyers – who will naturally gravitate towards firms with an engaged and loyal workforce. That’s because engagement is a major driver of productivity, encouraging people to perform at their best, as well as central to retaining talent. All of these things are crucial to accelerating growth and driving business success.

Also, because a culture that meets the needs of millennials can also help boost engagement amongst the wider organization, focusing on business culture can be an effective way to drive equity value by motivating and engaging the entire workforce.

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Keeping your service portfolio profitable: how ‘scraping the barnacles’ can make your boat go faster

By Jason Parks, Director, Equiteq and Pat Webb, Director, Equiteq

Clients give knowledge-intensive services firms such as consulting, IT services and media agencies difficult and constantly evolving problems to solve. Markets change, competitors emerge and macroeconomics shift, all of which have an impact on what’s hot and what’s not when it comes to M&A.

That means buyers are attracted to firms with a clear value proposition that transcends service offerings and the capability to respond and deliver a relevant service portfolio in a changing environment. Simply put, a firm is worth more when it is bought for its strategic capability rather than just offering the buyer additional service capacity.

Achieving a relevant and effective service portfolio means more than investing in new service lines, because it’s also important for consulting firms to phase out what is no longer working for the future value of the business.

David Ogilvy explained in his “principles of management” (which took his firm from a start-up to generating billions) that dropping services that have become unprofitable must be driven by management:

“To keep your ship moving through the water at maximum efficiency, you have to keep scraping the barnacles off its bottom. It is rare for a department head to recommend the abolition of a job, or even the elimination of a man; the pressure from below is always adding. If the initiative for barnacle-scraping does not come from management, barnacles will never be scraped.”

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How to put margins at the center of your business

There’s perhaps no topic more important for consulting firms than improving profits. Because of this, we recently ran two 30-minute webinars on improving margins. This week, we’re looking at questions asked during the first of these, which explored how to put margins at the center of your business.

If 20% EBIT is a good target for a consulting firm, would a firm achieving 40% EBIT be viewed as considerably more valuable?

At face value, a 40% margin business might appear more valuable, but it depends on whether the buyer considers this sustainable.

Some will interpret a margin of this size as indication that the firm has under invested in itself and will discount this. Because of this, we typically recommend that 50% of revenue be spent on the delivery of your services and 30% should be allocated for overheads – such as selling or marketing the business, admin costs or recruitment or IT fees – leaving the remaining 20% for EBIT.

Firm owners might be wise to consider investing any EBIT above 20-25% into growing the top-line instead.

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