Case study: Strengthening and leading Blue Sky to a premium sale

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Background

Blue Sky Performance Improvement, a boutique performance improvement consultancy, create a different approach to training and developing people to improve business results. Blue Sky leadership engaged with Equiteq to help build value over several years with the aim of finding and securing a deal with an acquirer who would buy at a premium price.

We worked closely with Blue Sky to grow their equity value, improving and strengthening key areas of the business such as market propositions and intellectual property that proved vital in demonstrating their synergy to the eventual buyer. At the end of a three-year process, Capita approached Blue Sky. Equiteq led the sale of the firm to Capita, who offered £12m, equivalent to a revenue multiple of 1.7.

The client’s situation

Because Blue Sky had sound business propositions and a steady client base in the performance improvement area of consultancy, the ambitious management team wanted to sell to de-risk the value they had built and sell whilst the business was performing well. To begin with, we conducted an Equity Growth Accelerator, and a quarterly review of progress continued over 36 months.

Although Blue Sky later decided to switch to another advisor to try and clinch a sale deal, it fell through, and they found themselves back at square one. Once we were re-engaged, we set about building growth and securing a buyer prepared to pay a premium price for its assets in 2014.

Our approach

Over three years Blue Sky used Equiteq’s 8 lever ‘Equity Growth Wheel’ with on-going consulting support to set up a best practice operating model and grow revenue, profits, and equity value.

Selling a ‘people’ business, where your strongest assets and intellectual property could walk out of the door, requires a unique approach to sale.  We helped Blue Sky build stronger market propositions, put rigour and process around capturing their intellectual property and strengthen the management structure.

Three years into the process and with profits growing healthily, Capita approached Blue Sky. Capita had recently won a large government contract and Blue Sky were seen as a key part of the delivery solution. We managed the sale process throughout, and negotiated a premium price.

How did this deliver value to the client?

  • Using our Equity Growth Wheel, Blue Sky made fast progress over four years towards best practice in key areas
  • Equiteq helped grow Blue Sky’s sales from £4.2m to £7m
  • Blue Sky were offered £12m, negotiated up by Equiteq from an initial offer of £10m, with 60% payable cash up front
  • Earn out period was reduced from 33 to 27 months
  • Equity value increased from 5 x profit to multiple of 7.6 x profit
  • The revenue multiple increased to 1.7

Equiteq took Blue Sky from being an attractive sounding business and transformed them into a robust business asset that sold at a premium.

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Does your consultancy have a real value proposition?

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A consultancy’s value proposition is a crucial component of its success. Are you selling only on the basis of your technical expertise or on the value you drive for your clients? The proposition describes the services you offer, such as IT implementation, strategy development or engineering design, for example. The value describes the results and benefits which clients obtain from using the services.

During our Equity Growth Accelerator (EGA) diagnostic we identify where a consultancy lies on the value-based proposition scale. At the lower end, there are resource-based propositions. These are offered and priced on the basis of the number of consultants deployed on the project. So called ‘time and materials’ projects are resource-based.

In the middle are value-based propositions, which are offered and priced on the basis of the predicted benefit to the client: the greater the value to the client, the higher the fee. Normally these propositions are fixed price and are not hard-wired to actual consulting effort.

At the upper end of the scale are gain-share propositions. These put some or all of the fees at risk, depending upon the delivery of agreed outcomes, and are structured in order to generate higher levels of fees than either resource-based or value-based. The element of risk associated with these propositions increases the unpredictability of the fees as well as the potential fee level. A typical gain share would see a proportion of savings, delivered by the project, being taken in fees by the consultancy.

Consider a supply chain consultancy working for a client to design and implement a new inventory management system. A resource-based approach would simply provide a number of consultants on an agreed day rate (or rates) and the fees would equate to the total number of days billed multiplied by the rates per day. A value-based approach would charge a fixed fee which the consultancy would price in proportion to the benefits they believed they would deliver which, in this case, could be the reduction in inventory costs that their client would enjoy at the end of the project. A gain-share approach would charge a lower fixed fee than the resource-based approach, plus a proportion of, say, the inventory savings that the project would deliver. Overall, the total fee for gain-share should be the highest of the three options.

There are benefits and drawbacks for each approach. When charging based on resource the consultancy is never ‘out of pocket’ as all days spent on the project will be billed. But its offering is more likely to be seen as a commodity and fees will consequently be lower and can come under even more pressure if rates can be readily compared with competitors. Furthermore, engagements may be easier to terminate by the client as the service is seen as paid for by the day (or hour). A resource-based approach may incur additional administrative costs if the client wishes to track – and possibly challenge – the time spent on the project.

Value-based charging can attract higher overall fees than resource-based and is light on administration. It enhances the status of the consultancy in the client’s view and provides longer term certainty of fees compared with both resource-based and gain-share. However, margins can be eroded if projects consume more consulting resource than estimated

Charging using the gain-share approach provides the opportunity for earning the highest possible fees and is easier to sell as the engagement represents a very low risk to the client. It also aligns the client and consulting goals. However, gain-share propositions carry with them the highest level of risk that the consultancy might lose money on programmes of work. Unless the benefits are very strongly linked to quantifiable metrics, and unless the criteria for benefit calculations are completely transparent, disputes over payments can easily arise.

If you can mitigate the risks of gain-share programmes then you will have the strongest propositions of all and the opportunity to really drive up revenues.

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Case study: Focus on profit and leadership brought buyers to Easton

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Background

Founded in 2000, Easton Associates provided product and business strategy consulting services to companies in the life science industries. In 2009 they approached us asking for a business valuation and market risk assessment and we valued them at $5m. By helping them restructure the leadership and to improve sales and marketing over the following two years we helped them grow their profit and the value of the business increased to between $12-$15m. In 2012 Easton sold to Navigant for $15m.

The client’s situation

Easton was a consultancy on the up, but it was struggling to convert sales into revenue and profit. The ambitious leadership team was keen to rectify this and turn the business into a thriving consultancy that had a true handle on its bottom line and was worth something on the M&A market. They asked Equiteq to help.

Our approach

When we first came on board, Easton had five partners. To improve decision making Equiteq helped the team re-structure and Easton appointed a chief executive officer. She was charged with, and given a bonus for, delivering a new profit target. Easton used Equiteq’s 8 lever Equity Growth Wheel to help them introduce best practice in driving sales and profit growth, improving intellectual property, and formalizing sales and marketing processes. Turning sales into revenue and profit was a key priority, and Easton needed to put consistency around their sales and business development processes and to make staff more accountable for delivering targets. Gross margin targets were set in line with capabilities and incentive bonuses offered on delivery. Elsewhere, building value into a ‘people’ business, where, in theory, your intellectual property is in people’s heads and on laptops, requires a unique approach. We helped Easton build detailed market propositions and put rigour and process around how they captured and recorded their valuable intellectual property.

How did this deliver value to the client?

Easton made rapid progress over a two year period using the Equity Growth Wheel, with a specific focus on sales and profit growth, market proposition, intellectual property and management quality

Equiteq supported Easton in:

  • re-structuring their leadership team to provide better clarity and focus
  • growing revenue by 37% – from $9.5m to $13m in two years
  • growing profits from $650k to $2.5m – an increase of 280%
  • Easton’s valuation grew by $10m in two years

The EBIT value of the firm started at four but reached a multiple of 7.5 at the end of the engagement