Demand for acquisitions set to grow in 2018

Our fourth annual global survey of buyers of consulting businesses delivers current, actionable intelligence in the five segments Equiteq specializes in: Management consulting, IT consulting, Media & Marketing, Engineering consulting and HR consulting. Findings, published today, reveal:

  • Buyers expect to initiate 50% more acquisitions year-on-year
  • Convergence continues to be a key trend as buyers look to diversify
  • 55% of buyers think targets could be better at communicating their market proposition
  • 94% of buyers say it is important to retain management teams post-acquisition
  • Over 70% of targets do not make their IP apparent to prospective buyers
  • Three quarters of buyers expect at least 40% of a target’s clients to be blue chip
  • Deal structures are improving for sellers

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Build or Buy? Should you acquire?

In his three-part series, Build or Buy? Equiteq’s Adam Blatchford discusses the pillars for successful growth through acquisition. Adam begins by addressing the fundamental question: Should you acquire?

As a shareholder, you have set goals, both personally and for your firm.

Those goals may include building enough equity value to retire, start a new venture, or support your family; everyone is different, but most owners have a timescale and an amount in mind.

Acquisition could help you achieve those shareholder goals; it can add value to your firm if it is carefully and clearly aligned to your overall business strategy.

Acquisition is not a strategy in itself, it is a means which can be used to deliver the strategic needs of your business plan. First your strategy must be aligned to your shareholder goals, then you can consider if acquisition is the right way to accomplish that strategy.

There are right and wrong ways to grow through acquisition; you want to be scaling smart, ensuring business growth translates into equity value growth by avoiding mistakes and missteps, so that you can deliver your business plan and create value in your firm. The best way to do this is to view your firm through the eyes of a buyer, considering how the shape of firm you are building will be attractive to a future investor.

There are a number of ways that acquisition can be valuable to deliver your strategic needs and to simultaneously build value to a potential buyer.

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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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