Equiteq’s Buyers Research: Your questions answered

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We launched our first Buyers Research Report in October and in that time we have presented our findings to consulting firm owners both in the US and UK. Here, we share some of the questions we’ve been asked during this process and our answers.

If you’d like to ask a question, yourself or hear more about our findings, you can join our free UK webinar, ‘Thinking of selling your consulting firm? 5 things you need to know’ , from 12.30pm to 1.30pm GMT 11 Dec 2014.

If my firm falls outside the size range that buyers indicated was most attractive to them ($15m-$40m) does it follow that it will be harder for me to sell?

No, not necessarily but what it does mean is that you’re likely to have a slightly smaller pool of potential buyers. $40 million is a very large size for an independent consulting firm. Firms larger than this, that are focused in a particular niche or have a highly valuable service offering, are extremely sought-after.

What are your thoughts on the minimum size of firm that a buyer will be interested in?

In terms of the market, firms of all sizes sell. In fact if you consider firms smaller than $5m to be ‘very small’, about 40% of the market volume is in this size category. However, size is important to buyers because firms that are too small are generally high risk (financially unstable). But there are exceptions. Small firms that are rich in tangible intellectual property that the buyer can leverage rapidly through its organization are seen as worthy acquisition opportunities. You can read more about this in our article, Does size matter?

Are there any nuances in your research regarding specialist firms, for example, industry sector specific firms?

What buyers have been very clear with us about is that they like specialists. They like a consulting firm to have focus in both what it offers and in what markets. For strategic buyers this makes it easier for them to identify what a target firm does and how it fits into their organization. Industry specialization is a positive or, more accurately, the flipside is that diversification in service offerings and industries serves as a negative.

How long must an upswing in revenue and profit be maintained for a company to be attractive to buyers?

The key is explaining why it happened. You can demonstrate an upswing for as little as three months and get significant credit for that if the reasons are good. What did you do to achieve the upturn and how you will ensure it continues?

How do buyers view the business development function of small firms if they have only one or two rainmakers – is this a deal breaker?

No, typically they look at what the leadership team is bringing in compared to the rest of the firm and if this proves higher or lower than they norm then expect them to ask why. Also, it depends on the scale of the business, so if you are a $30m firm and 90% of the business is brought in by two people then they will want to know why this is.

How are buyers thinking about value, how are they determining value for the firms they buy?

Buyers will typically take a view of delivered profitability over some period of years. Equiteq’s valuation model takes a six-year view of financial performance both backwards and forwards. This is very similar to what buyers do. In our model we will discount by a proprietary and custom measure of risk that we institute with all of our clients. Buyers are typically doing the same; they discount the future based on their perception of risk in the future.

How important is marketing in generating premium value?

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Jim Horsley, Chief Executive of CHA PR, shares his insight.

If you’re looking for sustained growth and premium value when you sell, how much should you spend on marketing? As importantly, where do you get the best return both in terms of the content you produce and the channels you use to engage with the audiences you want to reach?

The accepted wisdom is that you need a marketing budget of 5% of your total revenue just to maintain your current position. To grow or gain greater market share the rule of thumb is that you need to at least double that investment. Equiteq’s own best practice advice is that 10% of revenue should be spent on generating business through marketing and sales.

We undertook a survey of senior marketeers in management and business consulting firms* in the UK to identify not only what is their level of spend on marketing but what type of spend made the biggest contribution to the business.

Not surprising, perhaps, 70% of respondents spend between 1 to 5%; the consultancy sector has rarely had an ambitious approach to marketing. Another 15% are in the 6 to10% investment category. However, only 2% spend more than 20%. More than a third say that spend will increase over the next 12 months.

So what kind of return do those firms get on their investment? 30% say they get a £10 return for every £1 spent; 14% say the return is £5 for every £1 spent and 17% say the return is £4 for every £1 spent.

Based on those figures, there’s a strong argument that any increase in marketing is likely to pay dividends. Most companies want marketing to generate better quality and more leads and measure its success on the number of leads, the sales revenue generated as well as the quantity of sales. Brand building is not high on their agenda.

It is perhaps this focus on marketing purely as a lead generation tool that makes many firms reluctant to increase their marketing spend. The benefits of building the brand are not as easily measured and often don’t deliver the short term impact that sales leads can create.

However, without a strong brand, companies often find it difficult to sustain growth in revenue and profitability long-term and to generate premium value when the business is sold.

As you might expect, thought leadership and other content production is very or extremely important in our respondent’s marketing activities. It is case studies that generate the highest number of leads as well as the best quality. Blogs and web articles come second in the highest number of leads and third in the best quality. What’s less effective on both counts are videos, survey results, infographics and best practice guides.

In terms of marketing channels, the top three generators of the highest number of leads are events, websites and telemarketing. In terms of quality of leads, the winner by quite a distance is events, followed by cold calling and websites. PR, e-newsletters and social media are low scorers on both counts.

From a brand awareness viewpoint, the quality of websites, one-off emails and webcasts and webinars are seen as the biggest contributor to the brand. PR and social media score more highly in this category than in their contribution to lead generation.

It’s not always an easy choice to make to invest more heavily in marketing (as opposed to bringing on board new consultants or more sales resource). However, the survey clearly shows that many business consultancies do get a high return on marketing. Such investment long-term can impact revenue growth and the value of the business and the brand when you come to sell.

*100 structured quantitative telephone interviews were conducted amongst senior marketeers in management and business consultancies in September, 2014. The research was undertaken by Illuma Research.

Is now a good time to sell your consulting firm?

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Imagine you had the opportunity to sit down in front of potential buyers of your firm and ask them questions about their buying strategy, what would you ask them? That’s exactly what we went through in constructing the questionnaire for our first Equiteq buyers report. We wanted to make sure we were focusing on questions that would help you decide whether now is a good time to sell and also help you assess what expectations you should have. We even brought together chief executives of several consulting firms to ensure that our questions were right on the mark. The result is more than 100 interviews with some of the major buyers of consulting businesses in the US and Europe who provide some fresh and thought provoking insights. They help pinpoint exactly what buyers are looking for over the next two to three years, whether they’re looking to buy more or less, and what types of deal structures and earn-outs are being used.

Highlights from the research include:

  • More than a six percent growth in deals is expected over the next two to three years – heralding the first big growth rate for eight years.
  • Nearly a third of buyers said they expected their growth to come through acquisitions rather than organically and an equal number are seeing more opportunities to buy than last year.
  • The average budget over the next year for those doing two acquisitions or more is $90m and for those doing one acquisition it is $35m. Nearly one in six of the buyers surveyed have budgets in excess of $100m.

The 2014 Equiteq buyers report hopefully answers the questions you would want to ask. It will help you decide whether you’re likely to get a premium price or not. It pinpoints the problems in bringing a deal to a successful conclusion. And hopefully, it answers the question as to whether now is a good time to sell.

Read the 2014 Equiteq Buyers Research Report here.

Straight from the horse’s mouth: what buyers want

research croppedIn September we will publish the results of in-depth research carried out with 100 commercial buyers in the US and Europe. The report will contain fresh insight into what buyers want, how hungry they are to buy, what’s particularly on their agenda and an indication of the prices they are prepared to pay.

To mark the launch of Equity Edge, our new online resource and information hub, we thought we would provide a sneak preview of some of these findings now.

In line with our own Global Consulting Mergers & Acquisitions Market Report 2014, buyers have told us they expect the market to pick up and deals to increase in volume over the next 2-3 years. They see more opportunities as economies improve in the US and UK.

What is the optimum size of consulting firm they look for? There is a wide spread between the minimum and maximum turnovers of target consultancies but on average, the optimum is a turnover of around $30 million.

There are a number of factors that attract buyers to a consulting firm, but four were deemed the most attractive. The first is financial stability (sales & profit growth and a reliable future forecast), followed by deep domain expertise in one main service area. Unique and leveragable Intellectual Property is also very important, as is being highly differentiated within the market it operates.

“Equiteq has deep knowledge of consulting firm M&A globally and it knows what buyers want,” says Jim Horsley, Equiteq’s research advisor. “But it also knows that information is much more powerful and engaging if it’s coming directly from the horse’s mouth which is why the buyers’ insight report, based on independent research, will be essential reading for anyone looking to grow and sell their consulting firm over the next few years.”

If you’re not already a member, join Equiteq Edge, to be kept up to date about this and other Equiteq reports.