Case study: Improving value and advising on successful sale for GIA

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Background

GIA, a world leader in customized market intelligence, serves companies whose decision-makers need a solid market understanding in order to grow and compete internationally.

With the support of our Equiteq growth programme, they had already increased their equity value by more than 250% in a 12-month period which ultimately culminated in us being appointed as lead M&A advisor on their eventual sale to M-Brain Oy.

The client’s situation

GIA had achieved good revenue growth and geographical expansion across the world; however their profitability history had been erratic, affecting their attractiveness to potential acquirers in the past.

Our approach

Our approach was to run intensive value-enhancement workshops in London and Helsinki to calculate the current valuation of GIA and then design an action plan to improve that valuation.

We formulated a plan which would increase the valuation of GIA by more than 100% by identifying unnecessary overheads and removing non-value-adding expenditure and encouraging each senior member of the team to commit to improved sales over a period of 12 months. Once the improvement plan was underway, we began our arrangement for sale.

How did this deliver value to the client?

During the process, GIA improved their EBITDA margin to greater than 15% and we were able to demonstrate to potential acquirers that these profit improvements were permanent, resulting in a much stronger valuation proposition.

  • We ran a comprehensive global marketing process, comprising approximately 80 buyers, which garnered significant interest in the business with more than 30% signing NDAs and taking the information memorandum
  • In a competitive process the final sale price achieved was significantly above the target valuation

GIA recognized our efforts in the sale and the performance improvement as critical to achieving the result. All shareholders, including the private equity house, were delighted with the result.

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Eight mistakes to avoid when building a sale-ready business

Eight mistakes when building a sale-ready business

Over the years, Equiteq has worked with many entrepreneurial owners of consulting firms to help them grow value and sell their businesses. However, from experience we see that only a fraction of consultancies grow to a saleable scale. In this blog, we’ll explore some of the mistakes leaders make that affect their success.

  1. Working IN, not ON the business – Particularly for early stage firms below $5m revenue size, this is a common reason why businesses fail to scale. Business owners should recognize whether they are spending too much time delivering for clients, as opposed to delegating and working to lead the growth of the business.
  1. Innovation distractions – Ultra-entrepreneurial leaders can get into the habit of spotting new ideas and innovations that promise to bring in millions to their firms, but often just suck resources out of the core business. Think: Will this new idea add leverage to the core service? Will potential buyers be interested in these assets together or is it worth considering launching a separate venture that does not distract?
  1. Value negative diversification – It is important to scale up while also remaining attractive to potential buyers. Diversifying and growing into different markets or verticals can dilute the focus of the company and its niche. Because buyers are often interested in specialized firms, business leaders should contemplate whether the company’s focus is spread too thinly and if a buyer will be interested in all of their business – if not, the business may be growing in a value negative way.

For more on the equity value risks in international office expansion, click here.

  1. Failing to professionalize the business – A business made up of very smart people who generate work by network selling may make a lot of money, but may have very little value and be hard to scale. Unfortunately, many owners can be slow to introduce the necessary cogs in the machine needed to guarantee future growth. Buyers are only interested in organizations with high potential to grow, but there isn’t any value in a company that relies too heavily on a small set of highly skilled individuals. When you come to sell the business, it is the demonstrable evidence of these disciplines and business constructs that will enable the buyer to place a value on your company.
  1. Misunderstandings of valuation – Consultancy owners sometimes mistakenly assume that their business is both valuable and sellable when buyers approach them speculatively. In the real world, poor knowledge on value often results in premature, bad, or failed deals. If you don’t know the realistic current value of your company, how do you know what good or bad looks like when decisions are to be made?
  1. Lack of a plan to become ‘sale ready’ – Sale readiness has two meanings: firstly, that the business is at a stage where it has reached the desired value and, secondly, that it is well prepared for a transaction. If the plan is to grow to $20m and exit in three years, then it is important to bear in mind that, though, the target of $20m might have been met, there might still be a high risk in completing a successful transaction. A lot can go wrong in the six-to-nine month transaction period.
  1. Inadequate shareholder alignment on exit strategy – If you are not the sole shareholder, then other shareholders will have their unique needs and goals. If these goals are too diverse, then growth may be held back, or a potential sale may be hindered.
  1. The Johari Window mistake – Supreme confidence is a valuable thing. While entrepreneurial achievements deserve all the hard-won kudos and respect earned, does this mean you don’t need to take advice on value growth and selling your company? Savvy owners that avoid this mistake build into their plans that they ‘don’t know what they don’t know’. They build a support structure around them to ensure that hazards are foreseen during value growth and that there is a high probability of a successful transaction when the company sells. So hire an advisor; if not Equiteq, then someone else.

If you’d like to read more about entrepreneurs’ eight biggest mistakes in building a sale ready consulting business, please read the full article here.

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Find the best buyer for your firm and employees

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When selling your consulting firm you will reach the point where you go into exclusive negotiations with your preferred buyer. This is after maybe 30 to 60 have been approached, 10 to 20 have expressed interest and of those 3 or 5 want to do a deal. If price is everything to you, then any buyer will do and no doubt you’ve selected the highest bidder. However this is rarely the case, beyond price there are usually other important exit goals.

There are several factors you should consider before going to market to sell your firm and during the sifting process towards closing a deal with your ideal partner.

Life after the sale – is your objective to exit immediately, do your earn-out and leave, or extend your career? If the latter, then the new home must be a company you really want to be a part of, doing the kind of work that inspires you, and provides you with superior benefits to the freedom and entrepreneurial life you’ve experienced so far.

Brand continuation and independence – are you happy for your company to be subsumed, or is it important that your brand grows as a result of new investment and assets provided by your buyer? Different buyers, financial and strategic, will offer different models and achieving the latter objective is more likely with financial investors than trade buyers, the former is more likely with Big 4 type entities.

Staff protection – how important is their future to you? If the reason for the acquisition includes economies of scale, some will be retained and some will go, so who do you want to look after? Buyer selection is key to how their loyalty is repaid. If most of your consultants came out of the Big 4 or other multi-nationals, they may not want to go back. Whereas others may be keen to be a part of a new company with more interesting work, career path and foreign opportunities.

Cast the net wide – considering the above, it will help in categorizing and prioritizing buyer types that may fit. When you take your firm to market, consider all the categories of buyer that may want your firm for different reasons. The obvious candidates are not always the best. Casting the net wide finds the surprise outliers that may offer a compelling opportunity.

Culture compatibility – after you’ve been presented to potential buyers and interested parties are in play, look hard at their culture. You’re coming from an agile, flexible organization, however if the buyer is a bureaucratic monolith, how likely is it that you and your staff can handle the red tape? If not, then the merger is likely to fail, along with your earn-out and legacy.

Price versus deal structure – You may have some good offers from companies that fit your criteria above, but perhaps one is offering an outstanding price. However, the headline price is likely to only provide 50% cash up front; the rest will (hopefully) come in the earn-out over two or three years. If another offer represents slightly lower total price, but is otherwise a better home for the business, you might seriously consider taking what at first appear to be less generous terms. Here is your opportunity to trade headline price for a better deal structure and/or reduced earn-out risk. As well as the best home for your business, you also want the highest possible likelihood of securing the other 50% of the deal.

Make sure you consider all of these factors throughout the process, because you are more likely to achieve a successful sale that ticks all of your hard and soft exit objectives. You will be richer, happier and more fulfilled when you have looked after yourself, your staff and legacy.

If you want to discuss your exit objectives and need a sounding board, please contact us and we’d be happy to help.

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Case study: Strengthening and leading Blue Sky to a premium sale

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Background

Blue Sky Performance Improvement, a boutique performance improvement consultancy, create a different approach to training and developing people to improve business results. Blue Sky leadership engaged with Equiteq to help build value over several years with the aim of finding and securing a deal with an acquirer who would buy at a premium price.

We worked closely with Blue Sky to grow their equity value, improving and strengthening key areas of the business such as market propositions and intellectual property that proved vital in demonstrating their synergy to the eventual buyer. At the end of a three-year process, Capita approached Blue Sky. Equiteq led the sale of the firm to Capita, who offered £12m, equivalent to a revenue multiple of 1.7.

The client’s situation

Because Blue Sky had sound business propositions and a steady client base in the performance improvement area of consultancy, the ambitious management team wanted to sell to de-risk the value they had built and sell whilst the business was performing well. To begin with, we conducted an Equity Growth Accelerator, and a quarterly review of progress continued over 36 months.

Although Blue Sky later decided to switch to another advisor to try and clinch a sale deal, it fell through, and they found themselves back at square one. Once we were re-engaged, we set about building growth and securing a buyer prepared to pay a premium price for its assets in 2014.

Our approach

Over three years Blue Sky used Equiteq’s 8 lever ‘Equity Growth Wheel’ with on-going consulting support to set up a best practice operating model and grow revenue, profits, and equity value.

Selling a ‘people’ business, where your strongest assets and intellectual property could walk out of the door, requires a unique approach to sale.  We helped Blue Sky build stronger market propositions, put rigour and process around capturing their intellectual property and strengthen the management structure.

Three years into the process and with profits growing healthily, Capita approached Blue Sky. Capita had recently won a large government contract and Blue Sky were seen as a key part of the delivery solution. We managed the sale process throughout, and negotiated a premium price.

How did this deliver value to the client?

  • Using our Equity Growth Wheel, Blue Sky made fast progress over four years towards best practice in key areas
  • Equiteq helped grow Blue Sky’s sales from £4.2m to £7m
  • Blue Sky were offered £12m, negotiated up by Equiteq from an initial offer of £10m, with 60% payable cash up front
  • Earn out period was reduced from 33 to 27 months
  • Equity value increased from 5 x profit to multiple of 7.6 x profit
  • The revenue multiple increased to 1.7

Equiteq took Blue Sky from being an attractive sounding business and transformed them into a robust business asset that sold at a premium.

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Is it time for you to de-risk and take some ‘chips off the table’?

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Taking chips off the table is a term used for when a business owner sells a proportion of her or his equity as an intermediate step towards a future 100% sale. This enables you to bank some money now, remove pressure to sell the whole company at the first opportunity, but remain with the firm and grow it even bigger, then sell your remaining shares for a more lucrative sum down the line. This article explores why you may want to consider this option, when to time it and how it could be achieved.

What typically drives owners to consider this option?

You’ve worked hard for years to build your consulting firm and seen one or two tough times in your journey so far, driven by the ups and downs of business cycles, or boom and bust economic cycles. You may even have had to put your home on the line and self-funded the business when money in the bank ran out and working capital was required. Now you’ve got the company into a great place and could probably sell it and move on. But you remain highly motivated and want to see it through to the next level, you don’t yet want to exit and retire. But neither do you want to risk another painful cycle and see your equity value fall again. This is when the option of a partial sale of shares may be right for you. You’ve earned the right to have your cake and eat it too!

Is now the right time?

Alongside your personal objectives, motivations and what you want financially, there are two major considerations on timing:

  • Business cycle
  • Market cycle

Business cycle – Where your company is in its lifecycle and maturity is a key driver. The optimum time in the lifecycle is when the business has proven itself by growing over the last 3 years, is at a peak and your pipeline and forecast shows continued growth. Maturity means that the business has achieved robustness, both in scale and financial stability, because small scale firms generally come with much higher risks for investors.

Market cycle – This is about supply and demand. Is it a buyers’ or sellers’ market? If your business cycle coincides with a peak in the market then a premium valuation of your equity is possible. At the time of writing this article in mid-2015, we’re in a sellers’ market where investors have war chests they need to use, but quality consulting firms in the growth niches of consulting are in short supply.  As you can see from the chart below, now is a very good time to sell a consulting firm. In 2014 deal volumes were 32% above the previous low in 2009 and the market rose to only 7% below the market peak in 2007. Valuations are also at a 5 year high.

Global consulting volumes

Options for a partial sale of equity

In the consulting sector, partial trade sales are not common, so for a consulting firm there are three main options:

  • Sell to a large financial investor
  • Sell to a small financial investor
  • Sell to employees

Sell to a large financial investor – Private equity (PE) is the predominant type of investor for consulting firms with scale. In the USA there are over 100 PEs who invest in our sector and about 25 in the UK. They are very flexible and will normally buy between 20% and 75% of your shares and these days will not always require a controlling stake. In addition to part ownership, PEs will also invest growth money in return for equity dilution across all shareholders.

In order to be attractive to PEs your firm would typically need to pass two main hurdles:

  • Some may consider firms with $1m EBITDA, but most need $3m and above
  • A growth plan they believe in, that enables them to triple their investment in 3 to 5 years

Sell to a small financial investor – This is the angel investor community and as a rule of thumb where you would go if your firm is sub $5m in revenue. Angels will typically invest up to around $1m plus or minus, and more often than not will want some involvement in the firm.

Sell to employees – There are numerous schemes and options for you to sell equity inside the firm, but large amounts of cash up front are less likely and in most cases in order to make it work you would need to offer your shares at a discount.

Conclusion

The decision of when and how to take ‘chips off the table’ needs to be made only after careful consideration of all of the options and possible outcomes. The current market is in a good place for sellers right now, so if you are thinking about this subject, then we’d be pleased to help inform your thinking and decisions, so please do let us know if you want an informal chat.

Case study: Focus on profit and leadership brought buyers to Easton

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Background

Founded in 2000, Easton Associates provided product and business strategy consulting services to companies in the life science industries. In 2009 they approached us asking for a business valuation and market risk assessment and we valued them at $5m. By helping them restructure the leadership and to improve sales and marketing over the following two years we helped them grow their profit and the value of the business increased to between $12-$15m. In 2012 Easton sold to Navigant for $15m.

The client’s situation

Easton was a consultancy on the up, but it was struggling to convert sales into revenue and profit. The ambitious leadership team was keen to rectify this and turn the business into a thriving consultancy that had a true handle on its bottom line and was worth something on the M&A market. They asked Equiteq to help.

Our approach

When we first came on board, Easton had five partners. To improve decision making Equiteq helped the team re-structure and Easton appointed a chief executive officer. She was charged with, and given a bonus for, delivering a new profit target. Easton used Equiteq’s 8 lever Equity Growth Wheel to help them introduce best practice in driving sales and profit growth, improving intellectual property, and formalizing sales and marketing processes. Turning sales into revenue and profit was a key priority, and Easton needed to put consistency around their sales and business development processes and to make staff more accountable for delivering targets. Gross margin targets were set in line with capabilities and incentive bonuses offered on delivery. Elsewhere, building value into a ‘people’ business, where, in theory, your intellectual property is in people’s heads and on laptops, requires a unique approach. We helped Easton build detailed market propositions and put rigour and process around how they captured and recorded their valuable intellectual property.

How did this deliver value to the client?

Easton made rapid progress over a two year period using the Equity Growth Wheel, with a specific focus on sales and profit growth, market proposition, intellectual property and management quality

Equiteq supported Easton in:

  • re-structuring their leadership team to provide better clarity and focus
  • growing revenue by 37% – from $9.5m to $13m in two years
  • growing profits from $650k to $2.5m – an increase of 280%
  • Easton’s valuation grew by $10m in two years

The EBIT value of the firm started at four but reached a multiple of 7.5 at the end of the engagement

The right time to sell

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Paul Collins, Chairman of the Board of Directors at Equiteq, shares some advice.

When building my first professional services firm, I was told that unless the firm generated ten times more than its existing revenue (£4-5million), the business would never sell. On the back of that advice we built the firm’s revenues up to £50million. Although the firm sold successfully, with hindsight the advice we received wasn’t very accurate.

In my experience since my first firm, I’ve discovered that the average (median) market price for a professional services firm is around the four to five million pound mark ($8-10m). A firm can realistically sell for that value and in some cases when smaller. Smaller firms that demonstrate something ‘hot’ from a capability or intellectual property point of view can get snapped up early by buyers seeking a competitive advantage.

Generally M&A advisers will identify three things that need to be in place for a firm to sell. Business growth should be at its peak performance, the firm’s market should be strong and the wider economy should be in rude health. The truth is that getting all three of these is a nirvana and only the very lucky will sell when all three factors are in their favour. Following on from the crash of 2008, many of the clients we’ve worked with reduced revenues and profits to suit market conditions. This acted as a reset button for their timelines for selling.

In today’s marketplace, a company should show at least two years of growth. This is lower than ten years ago when showing three or four years of growth was necessary. Yet given the turbulence in the market, buyers are open to shorter periods of proven performance. As a minimum performance for today, a firm should demonstrate at least 15 per cent EBIT, ideally closer to 20 per cent and at least 20 per cent growth per annum over two years.

From a size perspective, if a seller is looking for money up front then the firm should have over the four million pound mark in sales. In a typical deal structure this should see half of the firm value paid upfront. In a deal structured this way, the remaining fifty per cent will be paid over a period of time where the seller is locked into the business to deliver the profit performance. The likelihood that a buyer will put money up front for a smaller deal is low as such deals are viewed as high risk. A buyer needs to keep senior staff interested over the transition period to avoid a decline in business performance.

Where value lies between five and fifty million pounds, interestingly there isn’t much economy of scale where EBIT multiples are concerned. Although there is linear growth in EBIT multiple between zero and five million in sales, at the fifty and over mark it begins to decline due to a diminishing number of qualified prospective buyers.

The range of buyers has certainly shifted in the last ten years as well. In the build up to 2008 the largest buyer in percentage terms, driven by availability of cheap debt, was private equity investors. PE is currently making a resurgence in the market but trade buyers – mostly other professional service firms – are in the majority today.

Many factors affect the attractiveness of a firm to buyers. Absolute size in revenues and a good track record of growth will definitely attract buyer attention, especially if the company is in a service area in demand by clients. Smaller firms – less than $10m in sales – do sell in large numbers. However, the prices and deal structures in these sales are sub-optimal for selling shareholders. Selling your firm can make real financial sense if you put in the groundwork first and make sure you prepare for a sale. Firms should look to achieve greater than $10m in sales with profits of greater than 15% and demonstrable growth. By doing so, they will attract the right kind of buyers and be far more likely to sell successfully.

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