February 2020: Knowledge Economy M&A and Equity Market Update

  • Major deals profiled include Stone Point Capital and Further Global Capital Management’s acquisition of Duff & Phelps, CGI Group’s purchase of Meti and ICF’s acquisition of Incentive Technology Group.
  • Equiteq advised The Shelby Group on its sale to WestView Capital Partners and Choice Financial Solutions on its sale to Raisin.
  • The Equiteq Knowledge Economy Share Price Index rose over the month.

Duff & Phelps receives fresh investment from Stone Point Capital and Further Global Capital Management.

Target: Duff & Phelps is a US-headquartered provider of valuation, corporate finance and regulatory consulting services.

Buyers: Stone Point Capital and Further Global Capital Management are US-headquartered providers of investment capital.

Deal value: $4.2bn

Deal insight: Duff & Phelps has received fresh capital from Stone Point Capital and Further Global Capital Management to enable the next phase of its growth. Duff & Phelps has c.3,500 professionals located throughout offices in the Americas, Europe and Asia. The firm’s longstanding client relationships include nearly 50% of the companies in the S&P 500, 65% of Fortune 1000 companies and 70% of top-tier private equity firms, law firms and hedge funds.

Permira continues to hold a significant stake in the business as part of the consortium. Permira had acquired Duff & Phelps from Carlyle at the end of 2017. The deal valued Duff & Phelps at $1.75bn, implying a c.2.5x valuation multiple on FY16 revenue. The acquisition marked Permira’s eighth investment in the financial services industry and netted Carlyle 2.4x its investment, according to a report from The Wall Street Journal. During the hold period, Permira was able to partially enable the growth of the business through organic initiatives and also through acquisitions including Kroll in 2018 and Prime Clerk in 2019.

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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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Creating a C-suite to build equity value

If you own a knowledge-led services firm in a sector such as consulting, IT services or media and you want to grow revenues to, say, $30m, it is unlikely that the expertise of the founders will be able to drive this. What you need is a team of specialist C-suite executives on board.

However, at some stage a founders-only team will put a break on growth. Here are three reasons why founders maintain the status quo and fail to see the damage it may be doing to their business:

  1. Growth creeps up on you so you don’t notice the degree to which the requirements have changed

During the start-up phase your main focus will be delivering on your particular domain expertise, but as time goes by you’ll spend more time on anything from finances to dealing with people issues.

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Why giving away parts of your business could accelerate your growth. Seriously!


By Jason Parks, Director – Strategic Advisory Services, Equiteq.

Equiteq hosted a webinar on why equity incentivizing your key employees can improve equity value. In this blog, we take a look at some of the questions asked by attendees.

  1. I’d like to motivate my Managing Directors, but I’m nervous about giving too much away.

It’s a mistake to simply view equity schemes with key employees as good as giving away your business.  When done correctly, they can help you grow your consulting firm faster, thus increasing your equity value. Think about it: it’s better to own 70% of a $10m business than 100% of $3m company.

Managing shareholder dilution is important, but I would encourage you to first consider how to get your key personnel aligned with the shareholders’ interests and objectives. That starts with having a clear plan in place.

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Why equity incentivizing your senior team can improve equity value


By Alex White, Associate Director, Equiteq.

Last week we looked at how it’s important to ensure that shareholders in the business are aligned before preparing for sale. This week we’re exploring why equity incentivizing your senior team can improve the equity value of the business.

The gold standard to successfully grow and realize maximum value in people dependent businesses requires a high degree of shareholder and management team alignment, as well as strong financial performance.

Awarding shares (or options) to the right people in the right proportions is one of the most powerful tools at the founding shareholders’ disposal. It’s not the only tool, but it is the most potent, which also makes it risky if applied badly.

There are 7 key areas to consider.

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Is it time for you to de-risk and take some ‘chips off the table’?

Taking chips off the table cropped

Taking chips off the table is a term used for when a business owner sells a proportion of her or his equity as an intermediate step towards a future 100% sale. This enables you to bank some money now, remove pressure to sell the whole company at the first opportunity, but remain with the firm and grow it even bigger, then sell your remaining shares for a more lucrative sum down the line. This article explores why you may want to consider this option, when to time it and how it could be achieved.

What typically drives owners to consider this option?

You’ve worked hard for years to build your consulting firm and seen one or two tough times in your journey so far, driven by the ups and downs of business cycles, or boom and bust economic cycles. You may even have had to put your home on the line and self-funded the business when money in the bank ran out and working capital was required. Now you’ve got the company into a great place and could probably sell it and move on. But you remain highly motivated and want to see it through to the next level, you don’t yet want to exit and retire. But neither do you want to risk another painful cycle and see your equity value fall again. This is when the option of a partial sale of shares may be right for you. You’ve earned the right to have your cake and eat it too!

Is now the right time?

Alongside your personal objectives, motivations and what you want financially, there are two major considerations on timing:

  • Business cycle
  • Market cycle

Business cycle – Where your company is in its lifecycle and maturity is a key driver. The optimum time in the lifecycle is when the business has proven itself by growing over the last 3 years, is at a peak and your pipeline and forecast shows continued growth. Maturity means that the business has achieved robustness, both in scale and financial stability, because small scale firms generally come with much higher risks for investors.

Market cycle – This is about supply and demand. Is it a buyers’ or sellers’ market? If your business cycle coincides with a peak in the market then a premium valuation of your equity is possible. At the time of writing this article in mid-2015, we’re in a sellers’ market where investors have war chests they need to use, but quality consulting firms in the growth niches of consulting are in short supply.  As you can see from the chart below, now is a very good time to sell a consulting firm. In 2014 deal volumes were 32% above the previous low in 2009 and the market rose to only 7% below the market peak in 2007. Valuations are also at a 5 year high.

Global consulting volumes

Options for a partial sale of equity

In the consulting sector, partial trade sales are not common, so for a consulting firm there are three main options:

  • Sell to a large financial investor
  • Sell to a small financial investor
  • Sell to employees

Sell to a large financial investor – Private equity (PE) is the predominant type of investor for consulting firms with scale. In the USA there are over 100 PEs who invest in our sector and about 25 in the UK. They are very flexible and will normally buy between 20% and 75% of your shares and these days will not always require a controlling stake. In addition to part ownership, PEs will also invest growth money in return for equity dilution across all shareholders.

In order to be attractive to PEs your firm would typically need to pass two main hurdles:

  • Some may consider firms with $1m EBITDA, but most need $3m and above
  • A growth plan they believe in, that enables them to triple their investment in 3 to 5 years

Sell to a small financial investor – This is the angel investor community and as a rule of thumb where you would go if your firm is sub $5m in revenue. Angels will typically invest up to around $1m plus or minus, and more often than not will want some involvement in the firm.

Sell to employees – There are numerous schemes and options for you to sell equity inside the firm, but large amounts of cash up front are less likely and in most cases in order to make it work you would need to offer your shares at a discount.


The decision of when and how to take ‘chips off the table’ needs to be made only after careful consideration of all of the options and possible outcomes. The current market is in a good place for sellers right now, so if you are thinking about this subject, then we’d be pleased to help inform your thinking and decisions, so please do let us know if you want an informal chat.

Margin presentation is crucial to maximize equity realization

Margin presentation - money buckets cropped

Having previously given a general overview of consultancy financials and then having a closer look at revenue, our series now brings us to margins, which can make a big difference in how appealing your business is to a potential buyer.

There are different types of margins, but the two that consulting firm buyers focus most on are the gross margin and the EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) margin. It is very important to note that in the context of a sale process, both of these critical statistics can be “adjusted”, or modified from your normal accounting practice for managing the business, or paying tax. These adjustments are never intended to mislead a buyer, in fact the opposite is true. By moving some expenses to different categories, or eliminating some altogether, a seller is actually showing the buyer a financial statement that more accurately reflects how the buyer would view the financial performance of the business once integrated into their organization. The proper presentation can have a material positive impact upon value realized in a deal.

Gross margin is simply gross revenue minus the direct costs required to deliver services or engagements that generated the revenue. Direct costs always include the salaries and benefits of the consultants and independent contractors that delivered the work to the client; think of them as a fully loaded staff cost.

Direct costs should also include the time spent by partners in delivering client work, but not the time spent selling, developing intellectual property (IP), administering the business or writing blogs or other marketing activity. When we are preparing a client for sale, we will often analyze and adjust the direct costs for these items to ensure that the gross margin statistic accurately reflects the cost of delivering the company’s services, rather than also including the costs of running or growing the business.

This is important to a sale process because a buyer might make a judgement about a selling firm based on the gross margin percentage – if it is low they might think “perhaps there is a utilization issue!” However, if in reality there is significant partner compensation in direct expenses that should be in selling expenses, then the buyer is coming to a wrong conclusion based upon incorrect information. By way of example, let’s say a shareholder/partner makes $500,000 salary, and this normally appears in direct costs (thus reducing gross margin by $500,000). If, in fact, this partner only spends 40% of their time on client engagements, then 60% of their salary ($300,000) should be moved to the admin bucket (more on admin shortly). Therefore, gross margin is $300,000 higher.

EBITDA margin refers to the profit generated by the business after subtracting administrative expenses from the gross margin. Some administrative expenses are obvious, such as rent, the salary of administrative professionals and IT expenses.

A critical adjustment when calculating the real EBITDA statistic is related to allocating the shareholder bonus properly between compensation related to running the business and profit sharing (which would not be included in administrative expenses required to run the business). This can have a significant impact on a sale transaction: A seller might want to reduce his or her implied salary in order to present a higher EBITDA statistic to a potential buyer. However, in reality what they are saying in this case is that they are willing to work for that reduced salary after the transaction.

The final piece of the puzzle when calculating the correct EBITDA statistic in the context of a sale process is to remove any non-recurring charges that a buyer wouldn’t expect to incur under their ownership. For example, if you spent $25,000 last year on legal fees related to installing a share bonus plan for junior partners we would expect to remove that expense from the administrative bucket when showing a buyer what our “true” EBITDA is. As opposed to the adjustments discussed above, this actually increases margin by removing an expense from the income statement. A buyer will agree with the approach, however, as long as they would not have the same expense under their ownership.

Given the complexities of the various margin statistics, and the importance of getting it right first time when speaking to a buyer, it is critical that care and expert advice is taken to ensure the financials are correct.

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