Sales and profit growth (Part 2)

Sales and profit growth cropped

Lately, we’ve been running a series of free 30-minute webinars to help attendees grow the equity value in their consultancy firms and prepare for a sale of their business. Attendees at each webinar submit questions, and we’re going to be sharing and answering these questions in a series of blog posts. This week we’re looking at the final part of the Q&A session during the webinar on what your company’s sales and profit numbers say about how you run your business. You can read the first part here. 

  1. Which is more valuable to a buyer, a consultancy with (a) a lot of clients with lower revenue per client, or (b) fewer clients with higher revenue per client?

Client concentration is a risk for any organization. Buyers would be worried if your consultancy is earning 70% of its revenue from a handful of clients. This would cast doubt on whether the business would be able to sustain its current revenue levels should any of the clients leave or cut back on their spending.

The quality of your clients is a critical factor for attracting buyers, and it is important to have key clients that demonstrate your ability to service and sustain such relationships. However, spreading client concentration shows buyers that your offerings have the potential to be applied to their clients as well, and that your firm has resilience in its target market.

Tip: Try to diversify your client concentration and offerings as suggested here in our eight essential tips for planning for growth and exit.

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Dealing with your own perception of selling in order to sell your services firm

Cogs cropped 2 - Six key principles

This week we have a guest blog from Lars Tewes, MD of SBR Consulting. SBR Consulting is a sales transformation consultancy that works closely with consultancy owners to increase revenue by liberating sales potential within their practices.

Many consultancy owners start out as specialists in their fields, yet when they set up a business their responsibilities change. In order to ensure the growth of the company, they need to be involved in the sales side. Whether it is being the main person responsible for winning business or overseeing the consultants, this is an uncomfortable step as they often do not see themselves or their consultants (billable deliverers) as salespeople. Let’s look at how this may be affecting your business and how to overcome this prohibitor.

When we’re born, we don’t have any perception of sales but then something happens! Many of us experience bad selling tactics: a salesperson attempts to convince you to buy something you don’t want, being pitched when you’re not even the right person to talk to, being lied to about the facts needed to make a decision; talking at you without listening to what you want, etc. Equally, there are impressionable films depicting salespeople in their worst state of money-making greed such as, “Wolf of Wall Street” and “Glengarry Glen Ross”. You turn on the TV and see comedians caricaturing a salesperson as looking in the mirror and saying things like, “I’m a tiger!” We watch programmes like “The Apprentice” which seem to bizarrely endorse forceful selling tactics and unrealistically high-pressure environments.

I’d best stop before it becomes too negative, but think about it, if these are the pictures and impressions you have been indoctrinated with about sales, no wonder you or your team of consultants have bad feelings about having to “sell” or motivating your people to sell. The truth is that tragically most salespeople do not sell well but that does not mean the “selling profession” is all bad. So, whether you are asking your technical specialists to sell or you are selling yourself, you might be experiencing inner resistance because of this negative view of salespeople. It sometimes hides itself in the form of “I do not have time for business development,” which is rational but extremely illogical. You do not say this when asked to complete a technical project, you find a way to make it happen! What is fact however, is that every profession, not only the sales profession, has its unethical individuals. What is also fact is that every profession has its inspirational, trustworthy and caring individuals.

To help you change your view of what selling is, we define professional selling in the consultative arena by using the acronym S.K.I.L.L. ©

Selling is a partnership experience:

  • Partnerships are rarely built overnight. Someone may not be ready to buy from you today but by building the right relationships over time, you may be the ideal partner when the time comes.

Knowledgeable:

  • Keep building your knowledge around your value proposition, service, market trends, competition and most importantly clients. It will differentiate you and ensure your conversations are always valuable for prospects.

Individual relationships

  • Consultancy is a people business. You need to make building new relationships part of your job. Attend industry association events and form the habit and discipline of keeping in touch with your network even if just for coffee. They will appreciate it and want to work with you when the time is right.

Listen and add value

  • Become comfortable asking the right questions. Listen and add value by helping the prospective client understand their situation better. As a consultant you always did it. You’re just now doing it before the sale is made! This applies to existing clients too as there will be many opportunities you are not aware of where you could add value.

Liberate your own sales potential

  • Become proud of selling professionally. Stop linking the whole of the sales profession with the bad practices you have experienced. We can all be really effective at professional selling if we decide it’s about establishing trusted relationships and partnerships where both parties benefit and would be happy to act as a reference.

Try it! Decide to change your personal view of selling by tapping into our definition of selling – SKILL©. You’ll find yourself in healthy business development discussions. You’ll start to pick up the phone and call people you have been meaning to call for the past year for a coffee. As one recent CEO client expressed; “I’m looking forward to my new world of business development as I am knowledgeable about my market sector and all our clients to date have seen real RoI. I just need to get back out there.”

© SBR Consulting 2015. All rights reserved www.sbrconsulting.com

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Which of your revenue streams are the most valuable to a buyer?

revenue streams croppedRevenue may seem like a straightforward topic; what could be easier than adding up revenue? But the truth is that not all revenue is created equal. In the first blog in this series looking at consultancy financials, we outlined the profile of a healthy consulting business. In this blog we’re taking a closer look at the different components of the revenue line.

On the topic of scale: while buyers of consulting firms have told us that size is important, it can be trumped by other factors. Above a certain size, what scale indicates to a buyer is that you’ve found a valuable service offering and a method of selling it. Furthermore, a strong growth trajectory will trump revenue scale in most situations. Most buyers would prefer a high-growth $9,000,000 business over a flat $19,000,000 one because they would assume the faster growing business has a more valuable offering in the market. It will probably be easier to scale within their operation too.

So now to revenue. We said that it’s not all created equal, but what did we mean by this? Let’s take a look at the different characteristics of revenue:

  • Recurring revenue: this is revenue that repeats each year in a very predictable way. This is extremely valuable as it reduces the need to sell each year to hit budget. Recurring revenue could come from a long-term contract or project, or it could be in the form of an outsourcing contract that lasts multiple years
  • New client service revenue: This is a critical component as it represents new market adoption of your offering. But it is by definition new selling every year and so viewed as higher risk and, if it is a significant part of the future forecast, it could potentially drive a higher earn-out
  • Existing client service revenue: This is easier to sell since a strong client relationship can support the sale of several projects over multiple years
  • Product revenue: These are things such as training materials, software etc. and are usually seen as a follow-on sale to the core offering
  • Reimbursed expenses: Expense reimbursements sometimes come with a small markup depending on the contract terms with the client, but are not normally seen as valuable revenue

So as you can see, some types of revenue are more important to a business and more appealing to a potential buyer. For an owner considering a sale, it’s important to clearly quantify the different kinds of revenue in your business and understand how they will be viewed by the buyer community. High growth businesses with significant recurring revenue can be more attractive than purely service consultancies that have to sell the entire revenue each year.

Fundamentally, buyers of your business will value two things about your revenue: How easy it will be to scale within their organization, and how much risk there is that it won’t work. Of course, other factors must also be taken into account, such as sector focus, geographic reach, business model and margin, so it’s never as simple as this! If you’re interested in finding out more about how to grow and sell your consulting firm you can download our quick guide here.

Our third blog in this series of consultancy financials will be looking at the different kinds of margins and how they affect value.

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Financial profile of a healthy consulting business

Profile of a healthy consulting business

By David Jorgenson, CEO at Equiteq. 

Equiteq has analyzed thousands of consulting and professional services firms over the past decade. In fact we recently conducted research with the buyers of consulting firms to find out what they look for when buying consultancy firms. Although there is a wide range of buyer requirements, the most popular criteria for buyers was found to be consulting firms with revenues between $15m and $40m, stable financials, deep domain expertise and leverageable intellectual property.

Through our work and research we have gained a unique perspective on the financial metrics of consulting firms. These are important for firm owners to understand while they are growing their businesses and when it’s time to sell. This series will look at the important metrics, with the first exploring what a healthy consulting business looks like.

Below is a chart showing our view of the financial profile of a successful consulting firm. This is a general view and individual consultancies may vary.

Equiteq’s model profile

model graph

The first bar of 100% represents total revenue. The key thing to note is that not all revenue is created equal. We’re sure you have your own views on what types of engagements are better for your business, such as being more profitable or helping to add a more strategic string to your bow. Buyers will have their own views on the most valuable engagements and these can be a key driver of price in a sale process. We’ll go into more detail on revenue in the next blog of this series.

The 50% bar in this chart can either represent delivery cost, or its exact inverse – gross margin. This means that healthy consulting businesses have at least 50% margin after all the costs of delivering services are paid. Importantly, this does not mean that all partner costs need to be paid as part of this 50%, because often we find consulting businesses aren’t allocating partner time appropriately to the next category of expenses.

The next category of expenses is admin or overhead costs, which are the costs of running the business. This segment should come in at around 30% of costs. As mentioned above, it is important to make sure that the accounting is accurate. For example, if a partner spends 40% of her time selling, then 40% of her salary needs to be in the overhead bucket. If not, analyzing the resulting metrics won’t provide the correct answer! We have found that allowing 30% to be spent on admin and overhead costs provides a reasonable balance between investing in growth while not overspending on central infrastructure.

The remainder is EBIT, or Earnings Before Interest and Tax. EBIT (or EBITDA) is the accounting profit that is available for distribution to the owners of the business. Accurately positioning the true profit of a business is the most important numerical topic when entering a sale process or negotiation, so we will dive into much more detail on the topic in a subsequent blog.

While we will go into further details about each of these factors in future blogs, it is important to have an overall view of what kind of balance there should be in a healthy consulting business. If revenue growth is high but gross margin is low, questions need to be asked about pricing, or utilization, or the accuracy of the management tools used to run the business. Equally important, if overheads are too low a consultancy may be missing out on growth opportunities which could impact its sale price in the future. By having an understanding of what the profile in a consultancy should look like, owners can take steps to remedy problems and set their business up for future success.

Grow consulting sales with this pragmatic pipeline management approach

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Growing the sales pipeline and generating revenue is the number one priority for most leaders of small and medium sized consulting businesses.

However many firms fall short of their revenue targets and most experience erratic, unpredictable performance with peaks and troughs over the years. While there are of course many contributing factors to sales performance, one of the least difficult to fix is the way in which you manage your pipeline.

There are three questions we are frequently asked by our clients in order to help them put a plan in place:

1. How do we measure the pipeline and reliably forecast sales?

If you are going to drive up sales you need an effective way of measuring progress from current state and beyond. In order to do this you want to do the following:

  • Create a simple database of TRUE sales opportunities

There has to be a line drawn between a marketing lead and a real sales opportunity. Only the latter should be included in your forecast.

  • Categorise each opportunity with a success probability

Within your database, all opportunities should be categorised using four simple definitions that can be shared and understood throughout the whole organisation. These should be as follows: 0% (Prospect: a piece of work that you’re aware of); 35% (Good prospect: in discussion with client); 65% (Hot prospect: approval pending); 100% (Booked: project approved).

  • Regularly assess the overall health of the pipeline

The simplest way of doing this is to create a ‘stacked bar graph’ of the revenue per month of booked projects and discounted opportunities, for example:

Monthly Revenue

A healthy business will see a declining stream of booked revenue, but a bow-wave of discounted opportunities.  Over time you will quickly get a ‘feel’ for what looks good and what does not.

2. What stretch targets should we be setting our principals and partners?

Within a typical small or medium-sized consulting business, the stretch revenue target of a principal or senior manager could be anywhere between £1m and £3m depending on the size of support team and blended day rate for the services you offer.  In a business where:

  • A partner’s role is client (not project) management and sales conversion
  • The business turns over £5m to £10m
  • A typical ‘good sized’ project is £350k, but £1m projects are achieved
  • A strong client base exists
  • The business has a market presence and reputation in their specific field, with some sales leads coming into the company

then the target should be £2m. Adjust up or down depending on where your business sits against these factors.

In order to hit the target they will need to convert to ‘booked revenue’ £200k every month (that’s £50k a week!).  At the same time they will need to get verbal commitment for £300k every month (£75k a week), as well as adding a further £600k of good prospects to the pipeline (£150k a week).

This sounds like a difficult task, but it can be made much easier if you create discipline through a constant drumbeat of sales pipeline management activity.

3. How do we manage them towards achieving their targets?

There are three main drivers to making this happen:

  • Getting them to set sales meetings: record and measure the level of ‘front-end pro-activity’ in your selling teams in terms of meetings set and held. Measuring it will provide the necessary ‘encouragement’ needed to make it happen.
  • Keeping the pipeline moving: ensure that prospects are adequately ‘worked’.  You can only get converted orders from existing Hot and Good prospects, so it is important to also measure the value of new Good prospects added to the pipeline each month, as well as the value of projects moved into the status of ‘Hot’.
  • Setting regular sales pipeline management meetings: Holding all this data is one step forward, but to gain real benefit it needs to be monitored and managed. To do these we suggest the Managing Director or Partner runs a regular meeting with consultants holding sales responsibility to demonstrate that sales are important to the business.

All our recommendations may not be entirely new to you as we are presenting only the basic principles of sales pipeline management. That said it is surprising how many firms do not practice these important steps. This approach will not guarantee you any sales growth as this depends on a range of additional factors, however at the very least it should help to ensure that you do not lose revenue that you could be winning.

If you would like further information, we have an extended article on this topic which features more detail and examples of how to record, measure and monitor your sales pipeline.