2017 M&A trends

Steven Einstein, Equiteq’s newly appointed Vice Chairman, offers his thoughts on the trends experienced in the M&A market in 2017.

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.

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Build or Buy? Should you acquire?

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.

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How IP can make your profits fly

By Adam Blatchford, Associate, Equiteq.

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.

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Principles of Maximizing Profitability

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:

  1. 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.

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Why do human capital consultancies plateau? Part two – Clients & IP

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Last week we explored the important role a unique value proposition plays in helping human capital consultancies continue to grow, rather than plateauing at a revenue level of $3m, as so many do. This week we’re looking at how to target the right clients for growth and how to create and leverage intellectual property (IP).

After articulating the UVP (Unique Value Proposition) to include some indication of the results and return on investment a client might expect, the leadership team have to get it to the right clients; those where you have the right to win.

To find out where you have the right to win, go through your invoicing file and look at where your business has come from over the last few years. Create a simple matrix: a service/market matrix, like the example below.

Service Market matrix

What are the main industry verticals or affinity groups which have delivered the majority of your revenue and profit? What are your main service offerings? Find the intersecting cells which are strategic for your firm then focus your sales and marketing efforts there. In this way you will be able to drive revenue and growth.

Scaling a human capital consultancy requires a set of codified offerings which a growing team of trainers or consultants can deliver. This could take the form of, among other things, methodology to assess leadership skills, process maps, interview guides, or questionnaires. Having IP that is exclusive to your firm and that can be used by consultants with the same effectiveness, no matter if they are a principal or a new starter, makes you far more valuable to a potential acquirer. In fact, for those of you with aspirations to sell it’s worth having a look at our buyers research report, which shows that after financial stability buyers are looking for deep domain expertise. We are frequently asked to find firms who have a strong inventory of IP.

This IP also needs to be managed; who knows it and who needs to know it? What are the development plans to help the new consultants get up to speed quickly and how will you know if they are effective? This is the very subject you consult on your clients with and, like the proverbial cobbler’s children, it’s too easy to wing it and fall behind within your own firm. The IP you use to deliver your service is a major asset and should be managed accordingly.

If a client were to come to you saying they wanted to get the right UVP, to the right clients with the right IP, you’d do a superb job of building their leadership and organisational capability to deliver. So why not think of yourselves as your own most valuable client and do the same.

If you’d like to discuss any of the issues raised in this blog please contact us.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners grow and realize equity value in their business. Register here to gain full access. 

Eight essential tips for planning for growth and exit

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If you want to grow and sell your consulting firm you need a plan. You can leave it to chance, but the consequences of not planning are well worth noting. Firstly, you are unlikely to grow big enough to become an important acquisition target. Secondly, if you’ve successfully grown without a plan, when the time comes to sell, how can you evidence how past growth has been achieved and show a natural progression to an assured future forecast?

The following list is by no means exhaustive, but contains the eight things we believe are absolutely essential for those planning for growth and exit.

1. Market Proposition

Goal: Focus your growth plan where you have the greatest right to win

Build a matrix showing what services or propositions you provide into what markets (industry verticals, segments, geographies).  If you are selling and delivering all over the place you are likely to be diluting your efforts and resources. Buyers are attracted by a focused set of propositions that deliver value into a clearly defined set of needs and hot issues.

2. Management Quality

Goal: Drive the growth plan top down by delegating profit targets and managing performance

Each member of the management team should own her/his objectives and KPIs that when achieved will deliver the strategy and growth plan. It makes a big difference when everyone is pulling in the same direction. For buyers, the quality, capability, depth and breadth of the management team are of paramount importance in their decision to invest.

3. Consultant Loyalty

Goal: Plan your resources to keep pace with demand generation

Maintaining the right quantity and quality of delivery resources is critical to growth. Make sure you attract, develop and motivate the best quality staff by linking compensation to gross margin and profit growth. Buyers like to see motivated employees who are clear about their role and purpose, who perform well, with appropriate reward and recognition systems. #

4. Sales and Marketing Process

Goal: Plan to create enough qualified leads to deliver a reliable and predictable forecast

You can only generate predictability and consistency when you have a reliable sales and marketing engine running. If you generate qualified sales leads through marketing campaigns and measure the results, you will know the conversion ratios from the top of the funnel (leads) to the bottom (sales). Therefore you can incorporate generating enough demand to satisfy your new business targets in your pan. Predictable and effective sales conversion into targeted client groups is at the core of any potential buyer’s belief and confidence in the future forecast.

5. Intellectual Property

Goal: Identify and develop technology enabled IP to make your business more scalable

Your business plan should include investment in converting tacit knowledge into tangible IP. This will enable you to deliver higher value interventions, in shorter periods of time, at higher fees, with consistent quality of delivery. When you come to sell, buyers place great value on codified methods and tools that enable them to rapidly deploy your propositions. If they can take what you do with 50 people locally and give it to their 500 people globally, that IP is far more valuable than just acquiring 50 more people, all of whom can walk away after acquisition.

6. Quality of fee income

Goal: Plan to grow widely across your addressable market of strategic clients

In order to build a balanced client portfolio, you first need to identify what a strategic client looks like. If that is not done, you are more likely to sell into non-strategic clients and develop a long tail of minor engagements that will clog up the arteries in your firm. A balanced portfolio of existing and new clients gives confidence to buyers. It demonstrates that fee income is not at risk because of client concentration issues and the capability to develop new business is built into your firm.

7. Client Relationships

Goal: Produce account plans to go deep and wide into clients for sell-on and retention

Selling on into existing clients should be the route of least resistance to sales. Develop account plans by growing from your base in the client into white space. Start by drawing the organization chart of the account and ask the questions – Can we sell more work into areas where we have sold before? Which new areas require pro-active investigation and sales campaigns? Relationships at a senior levels, supported by documented managed account plans showing growing revenue streams, are highly desirable for buyers.

8. Sales and Profit Growth

Goal: Plan to grow 20% organically year on year, reliably and predictably

Sales and profit growth is an output of all of the other seven levers. If you’re executing your growth plan you will be driving up sales and revenues, so you will be able to predict future sales with confidence. However your costs will also be growing, so you need to manage your margins. Strong predictable growth in revenue, gross margin and net profit, underpinned with good day rates and utilization are highly sought after by trade buyers and financial investors.

Not having a plan can do serious damage to your growth and equity value. If you’d like to dig deeper on any of the points above, please read our more detailed article on the topic here. You will need to be a member of Equiteq Edge to access it but membership is free and takes only moments.