Training isn’t just for athletes

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This week we have a guest blog from Patrick Chapman, Business Development Partner at Elevation Learning.

Everyone agrees that most of the value of a professional consulting firm comes from the people within the organization. In fact, staff in a consulting business are so important that ‘consultant loyalty’ is one of Equiteq’s 8 levers of equity value. So if you want to grow your firm with a view to selling it one day, then nurturing and developing your staff has to be one of your priorities. Unfortunately, when looking to improve financials prior to sale, training is one of the first budgets to be cut. However, this strategy is undertaken at your peril and will end up doing more harm than good.

To build value, your staff team needs to have a shared language and consistent ways of working. This will allow different groups of consultants to come together quickly to form a cohesive unit for each client engagement, meaning truly chargeable work starts more quickly. This ultimately protects your margins and when the value of the whole exceeds the sum of its parts, your bottom line performance will benefit, meaning you’ll be more appealing to buyers.

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M&A trends amongst buyers indicate the potential for premium valuations in 2017

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By
 Ramone Param, Buyer Coverage Associate, Equiteq.

We’re pleased to be launching our third global research report from our annual survey amongst buyers of knowledge-intensive services businesses. The report delivers current, actionable intelligence that isn’t available from any other source and covers each of the five consulting segments that Equiteq specializes in: Management consulting, IT consulting, Media & Marketing, Engineering consulting and HR consulting.

Demand for acquisitions remains as strong as last year, with respondents expecting to make nearly 4 acquisitions in the next 2-3 years. However, buyers are seeing a slowdown in the growth of new opportunities coming to market. This may be a momentary slowdown, or it might suggest the start of a period of increasing competition for assets, supporting stronger pricing power for selling shareholders of unique knowledge-intensive services businesses.

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How a sale impacts your stakeholders

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If you’re thinking of selling your consultancy, there are many stakeholders to consider before embarking on the most important financial decision you’ll probably ever make.

1. Founder shareholders

We’ve had business owners wrongly assume that selling a business is like selling a home. If a sale falls through, your home remains largely unaffected and its value intact. However, that is not the case with a business – you only need to consider the time and effort spent on setting up a deal, along with vital competitive information you might have shared in the process. And, if you’ve never done this before, you lack the experience and knowledge to negotiate the best possible deal for you and your business (especially when earn outs are involved).

When engaging in a sale process, consultancy owners become distracted from the day-to-day job of bringing in new business and growing the firm, which can have a detrimental effect on equity value – another reason to bring in expert support.

Tip: Buyers are not interested in a business whose growth has either flat-lined or is in decline. 

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How aligned are the shareholders as you prepare for sale?

Alignment

By David Jorgenson, CEO, Equiteq.

Some may think that once the shareholders agree they’d like to sell the business, then this means that everyone is on the same page and it’s now a matter of finding a buyer. However there are a wide-range of issues that need to be agreed on in order to present a united – and attractive – front to prospective buyers.

Timelines and value are two of the most immediately evident points to agree on. If one shareholder wants to sell now for $1m, the second shareholder wants to sell in 2 years for $5m and the third wants to receive $10m for their share no matter how far in the future, then there needs to be some discussion about how to get the best outcome for all involved.

There is then the practicality of what actually gets paid. A deal can be structured in a variety of combinations with cash, shares and earn out lengths all in play and of differing appeal to shareholders involved. Shareholders will receive a payment which is proportionate to the terms of their agreement and a good deal adviser will keep all parties apprised of changes and what they will be taking out of the business at all times. Before embarking on a sales process, consultancies should ensure they have a well-drafted shareholder agreement to avoid problems down the line when a sale is well advanced.

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How strategically attractive is your consultancy to potential buyers?

Sales Prospection

A range of factors contribute to how strategically attractive a target is to a potential buyer. While different buyers will place different emphasis on these factors, to appeal to the widest number of buyers a consultancy should aim to stand out in as many of these areas as possible.

Sector attractiveness can be judged in two ways. Is the consultancy operating in a sector which is already attractive? Or are there clear drivers of demand in a hot sector? An example of the latter is the current trend for data architecture and management involving the move from hardware to the cloud. With more and more companies changing the way they store their data, consultancies operating in this area are in high, and growing, demand. In the media space, digital marketing consultancies are seeing high demand for their expertise.

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Three reasons to set your acquirer lens to panorama

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This blog focuses on how you can dramatically improve your odds of selling successfully, to the best buyer, with the best deal.

When selling to trade buyers, there are two main ways owners end up in a company sale process situation:

The market comes to you – This is where a buyer makes an uninvited approach to you about selling, you are attracted to the idea and pursue a single buyer process.

You go to market – This is where you’ve decided that the time is right and you want to launch a formal process to ‘go to market’ and find the ideal buyer.

To a layman, the first scenario has many attractions and the latter has some risks. However Equiteq recommends that you proceed with a single buyer process only in exceptional circumstances. There are three reasons why going to market should better serve your interests and reduce your risks.

1. Buyer demand is wide and increasing

Don’t limit your ambition and increase your risk with one buyer, when there is a large universe of potential buyers across the globe and their demand for acquisition is increasing.

Equiteq tracks all of the deals that happen in the consulting and professional services sector, from engineering to media consultancies. In the last 5 years nearly 6,500 buyers have acquired just over 10,000 firms, practices, or agencies. The pool of interested parties for your company will be diversely spread across different acquisition drivers and interests.

Economic and commercial globalization, plus technology convergence, is driving the need for larger firms to maintain growth by attracting and servicing an increasingly multi-national client base.

2. Your objectives when selling will be better satisfied

For most owners, maximizing financial proceeds is a primary outcome objective, but often different shareholders have varying financial concerns. If you have been approached by a buyer that unequivocally satisfies everything you dreamed of as a new home for your firm, all shareholders can be satisfied and price/deal structure is not your dominant need, then this may be a reason to seriously engage on a deal process with them as your preferred bidder. However, all of your eggs are in one basket and if the buyer pulls out for any reason, the deal is dead.

The most significant gain in going to market to attract multiple bidders is deal leverage and choice of home. Typically, going to market would include a filtering process on the 30 to 80 buyers approached, yielding 4 to 10 good quality bidders. This is the stage where leverage is at its maximum before ‘going exclusive’ with your preferred buyer, under a Letter of Intent with Heads of Terms agreed.

3. Transaction completion is significantly more likely

Notwithstanding the loss of choice on the ideal home and lack of leverage to get the best deal, there are two risks associated with a single buyer process – the elapsed time to close and closure probability, where these factors are mutually inclusive.

In the real world, from start to finish, a deal without any complications will take about 6 months. The risk for you is that the longer it takes, the more opportunity there is for something outside of your control to occur that causes you or the buyer to withdraw. Unfortunately, there is usually more at stake for you than your buyer, so in a single buyer process he can easily drag his feet, because the only significant leverage you have is to pull out.

If you have multiple bidders in place before exclusivity, you have a large amount of control over the selection of the hungriest buyer, the milestones he needs to satisfy while under exclusivity, and the terms under which the price is defended or improved while in due diligence.

Book a strategy discussion

If you’re considering the question “who will buy my firm?” and would like to get our insights on your market position, valuation potential and exit timing in a well prepared online call or meeting tailored to you, then please contact strategyreview@equiteq.com.

You can read the full article that this blog is based on here.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.

Key trends in the Australian B2B services M&A market

Australia & ChinaIn 2014 Australia became the second largest M&A market in Asia-Pacific, behind only China in volume and value terms. And across all industries, 2015 saw Australia M&A totals reach $146b, versus $117b in 2014, highlighting that there are exciting opportunities for both sellers and buyers in the “Lucky Country”.

The B2B services market in Australia is mature and vibrant across a number of segments, such as digital marketing and engineering. And while growth has slowed as a consequence of the evolution of the Chinese economy and the mining industry, it’s good timing for acquirers seeking targets and for sellers interested in joining larger organizations. The Australian dollar is at its lowest point against the US dollar in 7 years, a situation that is particularly appealing for international buyers. The country is demonstrating economic stability with prudent policy making, close trading relationships with China and well-targeted fiscal stimulus. The middle market and SMEs are the cornerstone of the Australian economy.

All the major global players in B2B services have operations in Australia and cross-border deal flows are healthy, with foreign investment (30% from the US, 45% from Asia, 10% from the UK) and outbound acquisitions.

Data from our Global Consulting M&A Report 2016, the only publicly available information on the global consulting M&A market, found that 75% of deals done worldwide were completed by only 5 countries: the US, UK, Australia, France and Canada.

Figure 18

Asia Pacific accounted for around 13% of all deals, largely driven by activity in Australia. The country experienced 3% growth in 2015 deal volumes, recovering from a 2014 decrease in deal activity of 5.8%. Its deal volume increases in 2015 were aided by falling commodity and currency prices that helped keep acquisition targets in the region competitive to international buyers.

Our research shows that buyers’ acquisition expectations have more than doubled in the past year. This reflects a growing M&A market in consulting, IT and other segments, underpinned by buyer appetite that continues to increase in size and volume across corporate and private equity buyers. With Australia having seen 25 years of consecutive economic growth and enjoying a thriving B2B services sector, we can see an exciting year of activity in this market.

If you are preparing to sell your consulting firm and would like to discuss your exit plans, please contact Pierre Briand, Managing Partner, on Pierre.Briand@equiteq.com

Facts and figures on Australia:

  • Population of 24m with Melbourne and Sydney combined reaching almost the 10m mark
  • 2015: GDP +2.3%, CPI +1.7%, unemployment rate 5.9%, GDP/capita US$64k
  • 12th economy in the world and AAA rating
  • IT and new tech sector ca $50b
  • Australia’s “soft power” in Asia: 260,000 Asian students in Australia

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.