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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Sales and profit growth (Part 2)

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Lately, we’ve been running a series of free 30-minute webinars to help attendees grow the equity value in their consultancy firms and prepare for a sale of their business. Attendees at each webinar submit questions, and we’re going to be sharing and answering these questions in a series of blog posts. This week we’re looking at the final part of the Q&A session during the webinar on what your company’s sales and profit numbers say about how you run your business. You can read the first part here. 

  1. Which is more valuable to a buyer, a consultancy with (a) a lot of clients with lower revenue per client, or (b) fewer clients with higher revenue per client?

Client concentration is a risk for any organization. Buyers would be worried if your consultancy is earning 70% of its revenue from a handful of clients. This would cast doubt on whether the business would be able to sustain its current revenue levels should any of the clients leave or cut back on their spending.

The quality of your clients is a critical factor for attracting buyers, and it is important to have key clients that demonstrate your ability to service and sustain such relationships. However, spreading client concentration shows buyers that your offerings have the potential to be applied to their clients as well, and that your firm has resilience in its target market.

Tip: Try to diversify your client concentration and offerings as suggested here in our eight essential tips for planning for growth and exit.

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Are your client relationships building or stunting your firm’s growth?

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It is likely that if you are a consulting firm with revenue of anything up to $9 million, you have client relationship issues. We’re not talking about the day-to-day quibbles common to the client-consultant dynamic, but strategic relationship challenges that need to be addressed if you are to grow equity value in your firm and/or smash the glass ceiling of $10m (a target that only one in 20 consulting firms achieve).

To help frame your thinking around this issue, we have four questions every firm should ask itself.

What proportion of your client relationships involve work that is aligned with the strategic objectives of your firm?

Many consulting firm client relationships could be described as ‘happenstance’, especially in the early days when a firm is just starting out. Relationships that have occurred rather than planned. These relationships often become an albatross around your firm’s neck. The work you are doing for them isn’t the right sort of work that supports your service market matrix and won’t help you build your firm’s value.

It can be a tough decision but if the work isn’t right, don’t do it.

Many consulting firms are not strategic about the clients they nurture and keep. This leads us to the next question.

Are you focused about the types of client you want to attract?

Working with the right clients doing the right work starts with the ‘attraction’ process. Be strategic with who you pursue. Your sales and marketing work must be aligned with your unique value proposition.

The quality of client relationship management extends from your account planning methods to the way you nurture influencers, decision makers, dormant clients and old contacts. Good firms invest in CRM or a contact management system to assist in relationship development with individual contacts. Quality processes such as these enhance your ability to acquire, retain and build your client base, increase your revenue per client and improve the quality of your fee income.

Are your client relationships company-to-company or reliant on individuals?

Account management systems are essential to building robust client relationships that are company-to-company opposed to being reliant on individual relationships. This works both ways. You don’t want to be vulnerable if a client relationship is held by one person at your firm. You will lose that business if you lose them! Conversely, your firm’s relationship with your client is vulnerable if it is only with one person at the client-end.

An understanding of the make-up of each client relationship at partner-level within your firm is essential to protecting and growing your firm’s revenue and consequently its equity and sales value.

Do any of your clients account for more than 20-25% of your revenue?

Alarm bells should be ringing if one client accounts for more than 25% of your fee income. We have seen the effects of this recently with Microsoft’s contractor crackdown. Lots of consulting firms are now in a precarious position because of this decision – they have too much of their business with one client, Microsoft.

In conclusion

Client relationships are the lifeblood of consulting firms. Yet it is amazing how many companies we work with that do not give these relationships the attention they require. Suffice to say, consulting firms over the $10 million mark do not have these problems and that’s down to the fact they wouldn’t have reached the size they have if they did!

‘Client relationships’ is one of our 8 Levers of Equity Value. We describe our equity growth programme using the metaphor of a wheel: the Equity Growth Wheel. By pulling on our 8 levers you can increase the speed of the wheel and the equity growth of your firm. Used as a benchmark as well as a strategic planning tool, the Equity Growth Wheel can help you ratchet up the value of the firm and your pension fund. You can read our article about the 8 Levers here.