Ramone Param, Associate Director, Equiteq recently led a webinar looking at how to attract the type of buyer that best aligns with a seller’s business strategy and future growth trajectory.
In the consulting sector, the majority of deals are undertaken by strategic buyers. One of the most prolific buyers, Accenture, completed seven deals in Q3 2017 alone. The involvement of private equity firms in the consulting sector has traditionally been cyclical, although recently there are many actively acquiring private equity investors within the sector.
When considering a sale, it is important to understand the differences in the way these two buyer groups approach transactions to ensure you are partnering with a buyer whose business strategy aligns with yours.
Despite a politically-charged global environment and the increasing number of regulatory hurdles, the high levels of M&A experienced in 2016 have been resilient in 2017 and we have also seen the continuation and evolution of a number of trends.
Looking at M&A broadly, we are seeing that regional differences are no longer as prevalent. In an increasingly global economy, acquirers from Europe and North America alike are taking an active role, canvassing the global market place for M&A opportunities that support their non-organic growth ambitions.
Our fourth annual global survey of buyers of consulting businesses delivers current, actionable intelligence in the five segments Equiteq specializes in: Management consulting, IT consulting, Media & Marketing, Engineering consulting and HR consulting. Findings, published today, reveal:
Buyers expect to initiate 50% more acquisitions year-on-year
Convergence continues to be a key trend as buyers look to diversify
55% of buyers think targets could be better at communicating their market proposition
94% of buyers say it is important to retain management teams post-acquisition
Over 70% of targets do not make their IP apparent to prospective buyers
Three quarters of buyers expect at least 40% of a target’s clients to be blue chip
In his three-part series, Build or Buy? Equiteq’s Adam Blatchford discusses the pillars for successful growth through acquisition. Adam begins by addressing the fundamental question: Should you acquire?
As a shareholder, you have set goals, both personally and for your firm.
Those goals may include building enough equity value to retire, start a new venture, or support your family; everyone is different, but most owners have a timescale and an amount in mind.
Acquisition could help you achieve those shareholder goals; it can add value to your firm if it is carefully and clearly aligned to your overall business strategy.
Acquisition is not a strategy in itself, it is a means which can be used to deliver the strategic needs of your business plan. First your strategy must be aligned to your shareholder goals, then you can consider if acquisition is the right way to accomplish that strategy.
There are right and wrong ways to grow through acquisition; you want to be scaling smart, ensuring business growth translates into equity value growth by avoiding mistakes and missteps, so that you can deliver your business plan and create value in your firm. The best way to do this is to view your firm through the eyes of a buyer, considering how the shape of firm you are building will be attractive to a future investor.
There are a number of ways that acquisition can be valuable to deliver your strategic needs and to simultaneously build value to a potential buyer.
There’s perhaps no topic more important for consulting firms than improving profits. Because of this, we recently ran two 30-minute webinars on improving margins. This week, we’re looking at questions asked during the first of these, which explored how to put margins at the center of your business.
If 20% EBIT is a good target for a consulting firm, would a firm achieving 40% EBIT be viewed as considerably more valuable?
At face value, a 40% margin business might appear more valuable, but it depends on whether the buyer considers this sustainable.
Some will interpret a margin of this size as indication that the firm has under invested in itself and will discount this. Because of this, we typically recommend that 50% of revenue be spent on the delivery of your services and 30% should be allocated for overheads – such as selling or marketing the business, admin costs or recruitment or IT fees – leaving the remaining 20% for EBIT.
Firm owners might be wise to consider investing any EBIT above 20-25% into growing the top-line instead.
Smart Scaling is all about growing revenues and profits while also building your equity value, as opposed to doing one at the expense of the other. Intellectual Property is central to that, it is a ‘win-win’ because buyers want it and it drives profitable growth in your firm.
Whether your firm generates revenues of $20m or $100m, IP differentiates you. It ensures clients buy your services, means you can deliver profitably, and makes investors love you. This blog will focus on how to achieve that in your firm.
What is IP?
In simple terms, intellectual property is any knowledge recorded and maintained as a usable business asset. In most consulting firms, this means ‘trade secrets’, such as process maps, methodologies, training systems and software tools, rather than just copyrights and trademarks.
There are three main types of IP:
IP to market the business
IP to deliver business
IP to run the business
All three are important, but in the context of Smart Scaling we will focus on delivery IP. See here for a deeper discussion of the three types.
There may not be a more fundamentally important topic for consulting firms than improving profits.
Shareholders ultimately want a return on their investment and buyers are looking for evidence of healthy growth, while strong profitability is required to sustain growth and equity realization.
The levers that need to be pulled to improve margin – revenue and cost – might be well understood, but the combination of activities required are often more nuanced.
We’ve identified the top strategies firms can use to start improving profits now:
The leadership team must make profitability an ongoing focus
Profitability has to become embedded in the leadership team’s mindset for sustainable margin improvement to be successful.
Achieving this requires strong communication around accountabilities, clear success measures being established and tactical activities – such as margin exception reporting, resource management, and utilization forecasting – becoming integrated into regular business updates.
Once a shared understanding of what success looks like is established within this team, firms can create strategic work streams – such as market expansion or IP development – and make people accountable.