What I learned during the sale of my consultancy

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This week we have a blog from Marc Jantzen, founder and former CEO of Blue Sky Performance Improvement, who sold his consultancy to Capita in 2013. He is now an Associate Director at Equiteq.

We’d been building value in our consultancy with a view to selling it for several years and I was pleasantly surprised at the speed with which we received an offer, and at its size, when we decided the time was right to sell. However this was by no means the only surprise in a sale process during which I learned a lot.

Balancing everyday operations and deal demands

While there will obviously be more work to do during the deal process, the challenge of running the business in parallel with meeting information requests for the deal should not be underestimated. Bear in mind too that if you choose not to share the fact you’re looking to sell widely with staff, you will find yourself requesting information from staff and not being able to explain exactly why you need this data.

And the demands do not fall only on the management team; the finance team’s workload also increases dramatically. If I was going through the process again now, I would hire additional resource for our finance team, because we found that they didn’t have time to keep on top of our debtors like they normally did. This affected our working capital, which is a key figure that buyers scrutinize.

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Sale to a trade buyer

Trade buyers (also known as strategic buyers) are companies that buy other operating companies as part of their growth program and to fulfil other corporate objectives. As the most active category of buyers in the market, it is critical to understand how trade buyers think and behave as you build your business for eventual sale.

The primary driver for them is the overwhelming need for growth. All professional services firms require growth, and stated another way, protection against shrinkage and loss of relevance. This is true not only for large publicly traded firms that have to explain their financial results every quarter to investors, but also for smaller firms that compete with them for specific business. If you are building your own firm, you know how difficult it is to grow through hiring, service line expansion and finding new clients (organic growth). As firms become larger, the need to supplement organic growth by acquiring revenue becomes more and more acute.

There are two primary reasons why trade buyers make acquisitions:

  1. To build scale in the current business footprint (service line, geography) through the acquisition of similar firms which are rapidly integrated
  2. To expand the current model by acquiring adjacent firms, new service lines or new geographic coverage

Sale to trade buyer table

The most active trade buyers are the household names that you might expect. However, do not make the mistake of casting the net too narrowly when thinking about who might be a buyer of your business. As the business world seeks solutions and bundled services from their suppliers, we are seeing more and more companies who do not traditionally offer consulting services look to acquire businesses that can help them provide more of a solution-based offering to their clients.

Take the example of a multi-national equipment manufacturer client of ours. They are looking to buy consulting businesses in several of their product lines, such as in workplace safety consulting, so they can bundle that service as part of a broader solution to larger clients.

As you consider your options for selling your firm, it is critical to understand your position relative to larger competitors in your space and adjacent firms that might see your services and clients as additive to their current offerings. Even if a potential sale is years away, it is never too early to understand who might be interested in your firm and what you might do – and not do – to use that knowledge to your advantage.

NB: The term ‘trade buyer’ refers to those who acquire for strategic purposes and includes in it our definition of consulting and corporate buyers.

To listen to the recording of our webinar that we hosted on exit options when selling, please click here.

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Delivering a premium sale for GL Hearn


GL Hearn (GLH), a market-leading UK property consultancy, approached Equiteq as part of its annual strategy development process to provide an assessment of the M&A market.

Through Equiteq’s Valuation and Market Risk Assessment (VMRA) methodology, the board of GLH gained a good insight into the strategic sale potential of the business, prompting a decision to sell. Based on our deep consulting transaction experience, we were appointed as the lead advisor for the sale. Eventually, GLH was sold to Capita for £30m in 2015, a valuation which substantially exceeded shareholder expectations.

The client’s situation

GLH approached Equiteq as part of its annual strategy review to provide an assessment of the M&A market and, in particular, the outlook for GLH in a strategic sale scenario. We utilized our proprietary VMRA tool to provide a thorough analysis, which the board of GLH incorporated into its decision-making process to sell the business.

Our approach

Following the initial workshop, we set to work preparing high-quality sales documentation and undertaking research into potential strategic advisors, drawing on our knowledge of the buyer universe and key value drivers for these buyers.

We identified and shortlisted the most likely buyers, and approached the shortlisted companies as a priority. This enabled the process to remain focused and efficient whilst maintaining confidentiality. The ultimate result was a number of credible offers for the business which Equiteq negotiated and improved before the shareholders selected their preferred party.

During the due diligence phase, the focus was on quick execution and maintaining value, both of which we were able to achieve though strong project management and supply of quality information to the buyer.

How did Equiteq deliver value to the client?

It was clear that GLH had been well positioned for growth in certain areas of the property consultancy market, with management having made a number of strategic investments during previous years in this regard.

  • We presented these investments carefully; alongside the opportunity they created for a potential buyer, adjusted the historic performance of the business to show the strong underlying growth trend.
  • This led to a significant interest in GLH from the buyer community, soliciting a number of well-structured and valuable offers from credible international buyers.

This allowed GLH to make an informed and positive choice about which partner to consummate a transaction with.

Ultimately Equiteq achieved a premium valuation in excess of the GLH shareholders’ expectations and a final sale value of £30m.

To read some of our other case studies, please click here.

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.

Positioning financial metrics in a sale process

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There is no one way to prepare accounts, which means that it’s unlikely you’d want to put forward your standard internal financial reports to a potential buyer. Our fourth and final blog on consultancy financials will look at how to present your accounts when involved in a sale process.

While there are many ways to prepare accounting statements incorrectly, you might be surprised to learn that there are also many ways in which they can be prepared and still be accurate. Given the choices that have to be made when calculating financial results, it’s important to think carefully about how to present these to a potential buyer. It’s important to note, this is not a question of right versus wrong, or accurate versus inaccurate. What we are talking about in this blog is making sure that your financial statements accurately reflect your business performance in the eyes of the buyer. Furthermore, the accounting methods and policies you use to manage your business might be very different from the methods a buyer would use if running your business as a part of their company. The result is that a buyer might look at your internal accounts through the lens of their accounting policies and fundamentally misunderstand your business.

The lesson for the business owner is to always take a fresh look at the accounts and make adjustments for items that could cause a buyer to misunderstand the business. These items could be adjustments to gross margin as discussed in a previous blog, or removal of “owner expenses” that wouldn’t be incurred by the business after a sale to a new owner

One critical category of expenses that might need to be positioned in a sale context refers to growth investments. Put simply, these are expenses that you incur as the owner of a business (and that reduce profitability), but that benefit the buyer because they result in improved performance after the sale. For example, let’s say you hire a new revenue producer in March, and sell the business in December. Since it takes a new producer six months to build a pipeline of client engagements, she hasn’t delivered significant revenue by the time the transaction closes in December. However, her entire monthly draw, which might even be above normal as a transition salary, reduces EBITDA in the period right up to the sale. In our engagements, we would make sure the financial data clearly articulated her draw as a growth investment, and calculated both the real profitability as well as what the profitability would have been had she not been hired.

Another key strategy when positioning financial results to a potential buyer – or buyers – can be called “proving a trend”. This relates to a situation where the financial story of a firm has changed recently and there is significant, justified confidence that it will persist into the future. For example, a business that generated $10m of revenue in the last calendar year, and hired several new producers in that year which reduced profitability, is on track through March of the current year to generate $15m in revenue. Typically, a buyer will view the most recent full year as the scale of the business ($10m) and base a valuation on that number. However, in this situation, we want a buyer to use $15m as the base scale of the business, and to do that we need to prove that the uptrend is real and sustainable through:

  • Detailed pipeline analytics
  • Demonstration of booked engagements supporting the $15m number
  • Monthly or weekly run rate and capacity analysis to prove we are not being unduly optimistic

Financial information is of course hugely important when talking to a potential buyer. Presenting them with your standard internal accounts makes it likely that they will not gain the correct understanding of the business. This could result in you missing out on maximizing your sale price, or missing out on a sale all together. Because of this, external advice should always be sought on how best to present your financials so that the buyer can see what benefits they would obtain through purchasing your business.

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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.