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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The equity value impact of associates versus employed consultants

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Consulting firm owners face the constant challenge of deploying the right blend of non-employed contractor resources (associates) with full time consultant employees (consultants). There are three factors driving this management challenge:

  • De-risking the financial overheads in the business as a firm scales
  • Being flexible to meet the peaks and troughs of supply and demand
  • Paucity of skills of the right calibre available for hiring

However, the question that is rarely addressed in forward planning of resources – but often asked when we engage with owners wanting to sell their firms and exit – is how the associate versus consultant model impacts saleability and equity value.

Inevitably, there is no single answer to this as it depends on the acquisition needs of any particular buyer. But we can look deeper at the three factors of interest to buyers.

1) Risk in the acquisition

This is the biggest factor of all. While significant business and cultural synergies may exist, if the risk is high then your firm may be hard to sell and the value too low for you. If the buyer’s confidence in future growth is low, then no matter how attractive the synergies, the price he’s willing to pay will be limited and likely to involve an extended earn out period.

In order for the risk to be low for a buyer, certain operational disciplines need to be de-risked, i.e. embedded in the firm, with a low degree of dependency on the employed individuals, but certainly not associates, such as:

  • Business development for new client acquisition
  • Client relationship management for retention and on-selling
  • Project quality and control for client engagements
  • Intellectual property (IP) driving client value and internal leverage

No matter what the consultant associate model looks like, if these assets exist in strength, then the risk should be low for a buyer.

2) Business model synergy

In the broad world of consulting there are certain segments where buyers themselves use a business model where it is business as usual to deploy contractor resources. The human resources (HR) area of consulting and professional services would be one such segment.

For example, it is normal for a training company to have a high percentage of contractors. Buyers in this space understand that it is difficult to use an all employee model and make money, as the task of managing supply and demand in that environment is too difficult, with the variety of courses they offer and where trainers generally specialize on specific subjects.

So if you plan to sell into a part of the industry where use of contractors is the norm, then if you have also de-risked then a 25/75 consultant to associate ratio may be a perfect fit. However, that organizational structure may also be an inhibitor to other buyer categories that may otherwise see great synergies.

3) Preferences by buyer size category

If the drivers for your consultant to associate structure are not business model related as above, but just a low risk, high profit operating model, then it is more likely that smaller buyers will also value that profile. However for a seller, smaller buyers do not always have deep enough pockets to pay the price that would tempt you away from independence.

Generally the closer you get to a Big 4 buyer the less likely they are to like a high percentage of contractors in the seller. This is because their business model relies on charging high fees for inexpensive junior employees. So if you plan to sell to a strategic buyer with a global brand, then you will probably need the majority of your staff employed, from directors down to senior consultants and most juniors.

Final thoughts

If you want your future home to be close to, or within, the Big 4, don’t use contractors for anything but to manage peaks and troughs. If you think you’re going to sell into same segment of consulting where your organizational model works well, then aim for around 25% employed to cover firm management, development and project delivery quality. If you are happy to sell to the majority of buyers then the ratio of employees to contractors across the firm, including support staff, shouldn’t be more than 50/50. Employees should lead and manage the firm and factors such as business development. And associates should only be used for client delivery, ideally at levels only up to project and work-stream management.

If you’d like to read more about the equity value impact of associates versus employed consultants, please read the full article here.

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