What’s the point of knowing the value of your firm?

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Occasionally we encounter owners of consulting firms who believe that developing a simulated valuation of their business is a meaningless exercise before taking their firm to market. Their position is that the only valuation that counts is whatever a buyer is prepared to pay.

We agree that the actual price paid in the transaction is indeed the only one that counts! However without a simulated valuation in advance, the price paid is more likely to be lower than it could have been. Or there could even be no sale at all because you entered a process wanting far more than the hungriest buyer would ever be prepared to pay.

So how is it possible to produce a credible simulated valuation and why does it matter?

Every firm we take to market starts with a valuation exercise that gives us a range – the worst case, best case and most likely outcome. We can do this because we know the M&A market for consulting firms and have a tried and tested methodology which looks at a business through the lens of the buyer.

It takes into account the financial performance, forecast and risk in the business, as well as the market conditions and prices comparable consultancies have achieved. We’re able to factor in the likely synergy value to the buyer groups that should be interested and the potential effect of buyers competing for your firm (depending on how hot your consulting sector or discipline is).

Now armed with a valuation, what are the benefits to you as a seller?

  1. By modeling the valuation range, we can identify where short term value enhancements can be made. If these weren’t addressed the sale price could be reduced before or during due diligence. As everyone wants to sell their business for the best price, it makes sense to get the business in the best possible shape before going to market.
  2. The development of the valuation provides good input to the strategy adopted in the sales process which increases the chances of taking the price up to a premium level or beyond.
  3. If you don’t have a view of the value of your business before you enter a sale process, you don’t know what good or bad looks like. Do you want the nagging feeling that you undersold your business when you later see competitors do exceptional deals? It could also be that you fail to strike a deal because of an inflated or unrealistic expectation.

As you can see in our annual M&A Report, the ‘typical’ firm sells for approximately one times its revenue. However every average comes with a range and in the consulting sector it’s a very wide range (anywhere between half and three times your revenue).

If you want to be towards the premium end of that range and achieve the best price for your consultancy, it’s important to be aware of what the market is likely to pay. By understanding the value of your business and remedying any weaknesses prior to going to market, you’re more likely to achieve a price that you’ll be delighted with.

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Effective communication is the difference between making your staff allies or foes in an M&A deal

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Our recent Buyers Research Report revealed some sobering probabilities of success when it comes to securing a buyer for your consulting firm. Buyers said on average that 82% of potential deals do not progress to a signed Non-Disclosure agreement and only 9% of the remainder get as far as Letter of Intent.

To be one of the 200 consulting firms sold across the globe per month, it is essential to mitigate inherent risks to improve the chances of a sale. Consulting firms are built on the skills and talents of people, therefore, employees wield considerable influence over the value of your firm. A buyer will assess the cultural synergy of a firm through its people. It is important not to underestimate the impact of communicating a merger or acquisition to them, especially as a means of gaining good will and buy-in internally.

During the sales process, the performance of your firm cannot be compromised under the scrutiny of due diligence. If growth is compromised, a buyer could have second thoughts on a deal. This means you will rely on employees to deliver and even, at times, go above and beyond their duties. So how you communicate with them can be the difference between employees becoming valuable allies or costly foes.

No two consulting firms’ circumstances are the same. Assessing what information to provide is a balancing act. Strive to give enough information so people feel in the loop, but not too much that should things change, as often they do in M&A proceedings, you could not be accused of causing unnecessary disruption to your business.

You absolutely want to avoid creating a grapevine effect, where information is passed around informally. These Chinese whispers inevitably lead to the miscommunication of key facts triggering confusion and anxiety. And this can have a knock-on effect with productivity and engagement.

So your judgement is key. Strong leadership, especially in times of change is essential to keeping people onside.

Neil Taylor is managing partner at business language consultancy, The Writer, and author of Brilliant Business Writing. He would say ditch business jargon if you want to win hearts and minds. ‘Write and speak like a normal human being. Being honest and engaging is just as important as being businesslike. Think about your people: what do they care about? If you know they’ll think, ‘what does this change mean for my job?’, come straight out with that. The temptation is to communicate the whole rationale for change, but people are much more likely to take that in if you’ve already acknowledged how they might be feeling.’

Taylor always advises to keep an eye on length of communication, ‘Don’t feel you have to go on and on. It’s much more confident to say what you’ve got to say, and shut up. And think about where they’ll read or hear it. On their mobile? Better make it even shorter, then.’

Some points to consider:

  • Assess they types of people your staff are and put yourself in their shoes. What would a deal mean to them? Try and anticipate how they might react and what questions they may have
  • Think about how to paint the big picture and acknowledge the role they have in it. Don’t assume your vision is obvious, you need to articulate it clearly
  • A regular communication schedule can be helpful, even if it only involves a holding statement. Think about how communications should be delivered; is it best face to face or over email?

In conclusion, keeping your business growing through the M&A process is essential. Deals can take anywhere between four to 18 months. If financial performance suffers during the process, buyers may be deterred from completing a deal. It is therefore imperative that you keep focussed on running and growing the business through the sales process. Achieving this will be down to your consultants and staff, so handle them with care.

Run your company as if it’s for sale

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Tony Rice, Partner at Equiteq, shares some advice.

I spoke with the owner of a consulting firm this week who said something that resonated very strongly with me and our work here at Equiteq. He said, “We are not selling our firm, and may never do so, but we run it as if it’s for sale”.

I wish I could have coined that phrase! It’s a mantra I highly recommend for the following three reasons, depending on your strategy for the future:

  1. Never to sell the firm – It’s great for cash flow, sales and profit growth, and sustainability of growth. By running your company as if it’s for sale, you will always be improving performance, reducing risks in the business and making it a more secure place to work for you and your employees. If you are never planning to sell your firm you may not want to make it an attractive acquisition target, but by default you will make it a more attractive place to work for employees, and for clients to ‘work with’.
  2. To sell or not to sell – We often meet owners who have not yet crystallized whether a future sale of the business is the chosen direction; exit strategy is not yet, or may never be on the agenda. In our experience things often change. Time moves on, people get tired of 18 hours days, circumstances alter. If you are not convinced that your business will never be for sale, then why risk having an unsellable or low value business if and when your mind changes?
  3. Planning to sell – It’s never too early to start the process of preparing for a sale. You may have a plan to do it in three or five years’ time, but most quality firms get approached by buyers before that. It may be an opportunity too good to miss and if you delayed the start of turning your business into a more desirable asset, then you are also delaying your value growth and the probability of a successful sale will be reduced.

If the mantra resonates with you as it does me, then a great place to start is understanding the 8 Levers of Equity Value and download our book, 100 Tips to Accelerate Profit and Value Growth.

The Myth of the ‘Hungry Buyer’


The myth of the ‘hungry buyer’ is one of the most prevalent and dangerous traps that you can fall into as an inexperienced seller. There is a common belief that the success or failure of a deal rests on how much a buyer wants to acquire your company, as opposed to a forensic analysis of how it will generate future profit streams. This is not always the case and this belief can harm your prospects on making the deal happen.

If sellers focus on the ‘hungry buyer’ myth, they are likely to concentrate too much on getting emotional buy-in. While there is a need to build up momentum and entice the buyer throughout the process, it is more important to develop a clear buyer proposition, based on real evidence, as to why your business is of value to them.

What should the buyer proposition be based on? One of the key elements is that it needs to be tailored to the potential buyers and their needs, at all stages in the process, not just during negotiations. For example, when approaching a pool of say 100 potential buyers with the initial blind profile, or teaser, you can’t expect to generate positive responses across the board if these documents are not tailored to the typical needs of each category of buyers in the pool. You need to understand what their needs are and why they would be interested in a company like yours. This is one of the key roles of an intermediary such as us.

By starting with buyer categories and drilling into specific buyers as the sale process progresses you can develop the ‘story’ of the business in a way which relates to what the buyer wants. You can highlight your strengths and strategy in a way which is most relevant to what the buyer wants and also address any concerns they may have at an early stage. This will help increase the chances of hooking their interest, both emotionally and logically based on a future profit business case, and help them be prepared to pay a premium price when the case is signed off at board level.

The second purpose of a buyer proposition is to build trust and confidence in what you are selling. It is very easy to present an overly rosy picture of how your business is going to perform in the future. However over optimistic forecasting is often revealed at the due diligence stage and can potentially lead to a breakdown in negotiations, or at least a reduction in the equity value.

What’s important in the proposition is to demonstrate hard evidence for the reasons you’ve achieved your historical performance levels. You also need to show that the same methodology has been applied to calibrating the forecasts included in your proposition. In this way, the potential buyer is more likely to believe and accept the forecasts you have produced. You can find out more about how to value your consulting business at Equiteq Edge, our free online resource tool.

While it’s important to put together a compelling package, backing this up with the facts and evidence is key. If you can put this into practice, you will give a potential buyer all the right reasons to invest in your company, which will increase your chances of both doing a deal and achieving the value you believe your business is worth.

Nine steps for selling your consulting business successfully


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This blog will give you an overview of the nine steps involved in a quality sales process. Taking you from valuation to company disposal with minimum pain along the way.

To ensure the process runs smoothly and to mitigate any risks, as well as maximising the value of your firm, adequate planning and preparation is the key.

Step 1 – Initial valuation and market risk assessment

In the first instance, it is crucial to establish a target valuation and identify any potential issues that may affect your sale. To place yourself in a strong negotiation position with your bidders, it is important to have an understanding of the following factors:

  • Return on Investment (ROI) based on your current financial performance and growth prospects
  • Buyer risk factors that may cause them to downgrade your firm’s value
  • A market premium based on current market activity
  • A synergy factor based on your ability to positively impact a buyer’s business

Our Valuation and Market Risk Assessment process assesses the risk factors that may cause problems or affect the maximum value. Once identified, you can put a plan in place to mitigate or eliminate the risks and maximise the value of your firm in the process.

Step 2 – Maintaining business as usual

Ensuring there are sufficient resources to manage business as usual activities and the on-going growth of the firm, in addition to the sales process is another vital step. Failure to do so may cause delays in the sale or reduce the initial price of the firm. It may be beneficial to employ advisors at this stage to reduce the management load of the sale process.

Step 3 – Building the buyer list

Using the intelligence from your team and your M&A advisor, form a list of 40 or more potential bidders/buyers who may be interested in acquiring your consulting company. Categorise the list into groups based on a view of their potential synergy with your firm. Synergy factors can dramatically affect the price achieved so it’s important to develop a strong story about synergy, customised for each buyer group.

Step 4 – Preparation of sale documentation

Your M&A advisor will be required to collect and produce the appropriate documentation in preparation for the sale of your firm. This comes in three forms:

  • The ‘Blind Profile: a two-page marketing document containing the financial, operational, service and client details without disclosing the name of your firm. It will also highlight the buyers’ synergy with your firm and may be slightly altered to target different categories of buyers.
  • The Information Memorandum (IM): a 30-page document containing all strategic, financial and operational information. This includes financial history and projections, service line descriptions, clients and markets, staff and compensation, assets and liabilities, firm strategy and reasons for the sale.
  • A compelling management presentation needs to be produced that can be customised and used in initial meetings with bidders.

Step 5 – Lining up legal and tax planning experts

Engage lawyers and tax planning experts early to minimise or avoid any issues that may impact on organisational structure and remuneration, contracts, shares, liabilities or company incorporation. Your M&A advisor will be able to recommended a trusted expert if you don’t have access to one.

Step 6 – Engaging the buyer list

With all prior background work completed, you can now start contacting your buyer list to begin the sales process. As an initial step, send out the Blind Profile then follow up with a phone call or email to establish interest and pre-qualify buyers.

Interested buyers will then be invited to sign a Non-Disclosure Agreement (NDA) preventing them from releasing information to third parties and reducing the risk of them poaching your staff should they be unsuccessful in buying your firm. These buyers will also receive a copy of the IM so they’re aware of the benefits of their purchase.

Step 7 – Initial offers from interested buyers

Those that wish to progress further will wish to meet the Management team. This will provide you with the opportunity to impress bidders by highlighting the quality of your firm as well as the aligned synergy elements relevant to the buyer.

Offers will comprise a total value and the proposed structure of payment but pay attention to both the relative value of the offers as well as any contingent risks. They may not necessarily provide the maximum offer value but perhaps offer a higher value upfront with the remainder of the consideration in safer, non-contingent financial instruments such as bank-guaranteed loan notes.

There may be several meetings with each bidder before indicative offers are made and the competitive nature of this bidding process will help to maximise the value of each offer.

Step 8 – Heads of terms and due diligence

Once you’ve chosen a successful buyer, you will need to request a ‘Heads of Terms’ document which describes the detail of the offer subject to successful Due Diligence (DD). You then enter a period of exclusivity where you’re prevented from progressing a sale with another third party.

The buyer will typically have four weeks to perform their DD, which includes financial, legal and potentially commercial and HR. In most cases, the buyer will wish to speak to one or more key clients so you will need to manage this part of the process carefully as not to expose your relationship with the client.

Step 9 – Signing the sale and purchase agreement

Your lawyer will then draw up a Sale and Purchase Agreement, together with warranty and disclosure documents for signature. If you’re certain the DD will not expose any problems and you’re comfortable taking the risk on legal fees if the sale doesn’t progress, the legal and DD process can be done in conjunction with each other.

Unless you’re lucky enough to find a buyer prepared to knock out other potential bidders, the entire sales process will take around six to nine months. You will need to be aware of any external factors that may cause a delay such as a market collapse or a key client who ceases doing business with you. Additionally, the longer the sales process, the higher the risk that something will come out of the woodwork for you or your buyer so keep this in mind.

If you have any questions about this process, we have started a discussion in our Equity Edge LinkedIn Group. Our experts will respond to any of your comments or questions.

Reasons the sale of a consulting firm can fail – Part 2

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The process of selling a consulting firm can be a fragile affair. For every M&A deal announced there are many more that fail or never get past the courtship stage for a wide variety of reasons.

We talked last week about some of the reasons deals can fall through including, taking too long to complete the deal, conflicting interests among shareholders, and sales famines while buyers are looking.

This week, we thought we would explore some more of the most common deal breakers and include tips on how to avoid them.

Don’t get cold feet

Deals can fall apart simply because owners have reservations or anxieties about selling. You don’t want to change your mind halfway through, so don’t enter the process half-cocked. Have clear objectives in mind and for each individual, pin down who wants to stay and who wants to leave and in what period of time. Do this and everything will be on the table up front and there will be much less scope for prevarication and indecision.

Don’t leave room for nasty surprises in the finances

The last thing you want during the pressure of due diligence is for the buyer to discover your ignorance or lack of understanding about the financials in your business. Or even worse, uncover something nasty that you should have spotted and dealt with in advance. This could be a simple accounting mistake, or a hidden bombshell like a fraudulent entry. If you have a finance director with an eye for detail and whom you’d trust with your life, you’re probably covered. If you’re not in this enviable position, then take measures to get your accounts professionally audited. Don’t enter the sale process until you’ve tested and retested your knowledge of all the numbers – the costs, revenues and profits – that govern your business.

Do find buyers with the right culture

Too many deals never get off the ground because of a culture mismatch between the seller and buyer. The buyer is going to walk away if they think integration will be difficult, and you’ll walk away if you’re worried about how your staff and clients will work with the new entity. Our rule ‘one buyer, no buyer’ applies here. The chances of cultural alignment are improved if you talk to a range of buyers. An M&A partner can be especially helpful here as it can undertake research and select buyers that ‘best fit’ your organisation. This is particularly important as the deal progresses through the due diligence phase when it’s likely that your team will have to meet at close quarters with the buyer’s management team to work on integration details. If your teams don’t get on the deal could be in jeopardy. By this late stage re-connecting with previous bidders is extremely difficult. It probably means starting the whole process from scratch at a later time and dealing with de-motivated shareholders that are rueing missed opportunities!

Do walk in the buyer’s shoes

When all the pleasantries are over, it always comes down to price. We’ve never met a seller who didn’t think their consulting firm was worth more to them than it was to the buyer. If you’re going to drag the buyer over the bridge between their price and yours, you need to be able to justify it and not come across as greedy. The best way to do this is to have a sound understanding of deal values in the current consulting M&A market, and know the synergy value of your firm to the specific buyer; something for which they will be willing to pay a premium. In short, it’s all about knowing the market, salesmanship, and seeking out a range of buyers with synergy who want to compete to buy your firm.

Finally, to conclude:

Don’t let bad luck strike

It’s difficult to mitigate bad luck. With all the best planning in the world, something unforeseen and unimaginable inside or outside your firm could happen. The best you can do is to plan for the unexpected just like you would with any other event in your organisation. If there is, however, one thing that’s more likely to thwart your progress to sale, it is your client market collapsing during the deal process. Diversity in your clients and markets is the ideal way to be safe from external issues. Back to our very first point, the longer the deal takes the more likely you expose yourself to bad luck, so aim to complete a deal as fast as possible.

You can of course make your luck by taking note of all our deal breakers to manage the risk…. then, it’s just a case of keeping your fingers crossed!

We have started a discussion in our LinkedIn Group on this topic. We would welcome your views and we will answer any questions you may have.

Reasons the sale of a consulting firm can fail – Part 1

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The decision to sell your consultancy is one of the biggest that you’re likely to make in your life and it is a decision fraught with complexities. The reality is you don’t know what you don’t know and that’s what we are aiming to address with Equity Edge, our recently launched resource and information hub for consulting firm owners.

The process of selling a consulting firm can be a fragile affair. All the initial goodwill and grace between you and the buyer can quickly turn into negotiating stand-offs and eleventh hour fall-outs. Months of meetings, due diligence, planning and drafting sessions can quickly evaporate due to nasty surprises, unclear expectations or just plain bad luck. Having the right people involved in the process can make a big difference.

For every M&A deal announced there are many more that fail or never get past the courtship stage for a wide variety of reasons. Based on our experience over the last few years of watching buyers and sellers walk away from the table, or seeing sellers reluctantly settle for tougher terms than they deserve, we thought we would explore some of the most common deal breakers and include tips on how to avoid them.

Don’t take too long to complete the deal

The risk of the deal failing over time follows the Pareto Principle; there’s a 20% risk of failure at the thin end of the time curve and 80% at the thick end. The longer time goes on, the more opportunity there is for something nasty to be found by the buyer and a greater chance of you falling out of favour with lady luck. Consultants are meant to be good at project management – so put it to use. Before you take your firm to market, make sure you have all the bases covered in the sale preparation and get the right resources ring-fenced so that all eyes are on the important balls.

Don’t enter the process with conflicting interests among the shareholders

If you have a complex share ownership structure you don’t want things getting messy when the buyer comes to the table. While you as the main shareholder may be highly motivated to sell, or settle for a certain deal structure, perhaps a junior director who hasn’t yet earned all his/her shares will have a very different view. If this comes out when the buyer interviews key staff, things will get complicated and it will be difficult to strike a deal. The only way to ensure this doesn’t happen is to resolve these issues with each and every shareholder in the process leading up to the decision to enter the market.

Don’t miss your financial forecast during due diligence

Missing your financial forecast during the sale process is very bad news. The buyer will worry about your financial management and may want to dig deeper into the cause, which in turn may uncover additional issues as they drill down into your financials. There are some things out of your control, but it’s within your power to make sure that you have a robust financial management and forecasting process and to choose the time to take your firm to market when you’re confident in the stability of your numbers.

Don’t suffer sales famine while buyers are looking

This is crucial because the profit multiple the buyer is prepared to offer is significantly dependant on their confidence that your profits will continue into the future. Clearly, if your pipeline reduces unexpectedly during the sale process then a fuse is going to trip in the buyer’s mind. It is likely it will trigger a deeper examination of your sales and marketing process and a possible reduction in their bid. Depending on your sales cycle, you need to put a concerted effort into sales and marketing in advance to make sure that the engine is tuned and everything stays on track during the sale process and beyond. Getting this right will also reduce the risk of missing future financial forecasts in earn-out circumstances or when your deal structure relies on future targets being met.

Don’t risk important people defections part way through

Losing a senior or key member of your staff during the process will do two things for the buyer; they will question the quality of your HR management and want to re-assess the value of their prospective acquisition. This issue is linked to conflicting stakeholder interests above but mostly it comes back to the measures you’ve taken to lock-in key staff well in advance of sale. If you’ve introduced motivational reward and recognition programmes along with an equity share ownership scheme, then you’ve probably done the best you can to reduce this risk. Don’t forget that 70% of something is worth more to you than 100% of nothing!

We will continue to examine the reasons a sale can fail in next week’s blog but in the meantime if this has raised any questions for you, we have started a discussion in our LinkedIn Group on this topic and would welcome your views.