Monthly Update – M&A Dealflow and Share Prices Increasing Despite Uncertainties

Last week, a well-known UK retailer tweeted, “A customer has just bought a 2021 calendar. Sir, we admire your optimism.”  

A neat encapsulation of how uncertainty across health, economic and political landscapes continues to shape 2020. And yet: stock markets continue to climb the wall of worry, driven by technology and – increasingly – knowledge economy stocks, while commentators continue to walk back from their worst-case forecasts for both the pandemic and its financial impacts.

As early as the start of May, our team started to observe positive signs in knowledge economy M&A markets. Already, after a short hiatus, existing deals were continuing, buyers and investors were already back in the market, and owners of resilient business were still pro-actively considering their exit options.

This momentum has translated into deal completions over the summer, with four Equiteq deals closed since the end of June, including:

  • Advising 4C, a leading Salesforce multi-cloud partner in Europe and the Middle East with over 350 employees, on its acquisition by Wipro – continuing the trend of consolidation in the Salesforce ecosystem, and illustrating Equiteq’s leading position advising on transactions in the digital transformation space
  • Providing advice to SIA Partners on their acquisition of Pathfinder, a leading change and transformation consultancy, as SIA continues their journey to strengthen their presence in UK and Ireland, and build a leading Tier-1 independent consulting firm
  • Advising Water Street Partners, a leading joint venture and alliance advisory firm, on their sale to Ankura, continuing Ankura’s push to establish itself as one of the leading global consulting firms. Our client’s comment neatly sums up the last few months: “It is hard to imagine the Equiteq team delivering a deal under more difficult circumstances. The COVID pandemic was breaking out as we signed the LOI … the team steered us through tremendous uncertainty with dogged persistence, extraordinary effort, real creativity, and integrity.”
  • Advising on a cross-border deal in S.E. Asia – details embargoed until September: more to come

It continues to be our view that the large pool of investors/buyers in market is not seeing adequate deal flow of high-quality acquisition targets like these. Owners of firms that are positioned to be among the early waves of new deals to come to market will meet this pent-up demand and may command a market premium.

Despite this, our community of owners continues to have reservations. In late July, we surveyed owners on their attitudes to M&A. You can download the report at the bottom of this post (or here). Key observations include:

  • By far the biggest concern owners had about M&A post-Covid is the prospect of achieving a valuation that reflects the true value of their business
  • Most owners are pessimistic about the strength of the economic recovery, and / or have seen detrimental impacts on their trading (although relatively few reported a strong negative impact)
  • Most of you don’t believe the worst of the health emergency is over

It’s probably worth re-stating that in current deals, to date, we have seen minimal impact on headline valuations – negotiations have centred primarily on deal structure (e.g. earn-outs not starting until six months after signing)

You might draw a tentative conclusion from the above that owners would delay their M&A process – but over half of those we polled are not delaying their plans. Perhaps one reason for this is – as a small but increasing numbers of owners told us – that the uncertainty and risks of delaying a deal outweigh the perceived benefits. Moreover, from conversations with the buyer community, we hear that, while the quantity, or even the overall quality, of bids and interest may have suffered in some processes, the knock-out offer is still there, at the same high value that might have been anticipated pre-pandemic.

Do get in contact with us if you’d like to talk through any of our recent deals and our latest thoughts on market trends – in particular, on valuations and deal structures.

In the meantime, an update on the Knowledge Economy Share Price Index. We’ve seen our index continue its recovery from March lows, easily outperforming the S&P 500, reflecting the importance of our sector to economic growth, and the increasing application of technology within sector firms.

The only sub-sector still down on a 12-month basis is “Human Resources”, which directly mirrors what we saw in our survey. A ray of hope there though – we’re seeing some training, leadership development and recruitment businesses with positive momentum (especially ones with some tech-enablement behind them). It could be a sector that benefits very strongly from a rebound as end clients scale up their investment in people and workforce transformation post-pandemic.

Knowledge Economy Share Price Index vs. S&P 500:

Knowledge Economy Share Index – Sub-Sectors:

Source: S&P Capital IQ

Note: The Equiteq Knowledge Economy Share Price Index is the average of Equiteq’s six segmental indices and is the only published share price index which tracks the listed companies within the knowledge economy. The index is continually revised to consider new listed companies and to remove businesses that are no longer relevant in each quarter.


The lessons I learned when selling my consultancy

Marc Jantzen is the former Chief Executive of performance improvement and training consultancy Blue Sky. We recently held a webinar where he shared the lessons he learned from selling his business to Capita and answered attendees’ questions on what it was like.

  1. How do you know if your business is ready to be sold? Do you sell when there is no growth / when you’ve reached saturation?

While the reasons for selling are always personal, it is unlikely that you’d find a suitable buyer if the business appears to be stagnating. Buyers are purchasing the future potential of a business to grow and generate profits.

So, if your consultancy isn’t growing, it is important to identify the cause and perhaps bring in advisors, like Equiteq, to help your business develop a growth plan that gets you in shape and ready for sale.

Click here to read a post from Paul Collins, Chairman of the Board of Directors at Equiteq, on the right time to sell.

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How do you know if you’re ready to sell your business?


Having a goal to work towards helps to focus activity. So if you’re a consultancy owner who has been growing a business with a view to one day selling it, regardless of the industry you operate in, knowing the signs that mean you’re ready to sell will help you achieve this aim more efficiently.

There are six areas that you need to pay attention to:

1. Buyer confidence: Buyers do not like risk and so are looking to purchase consultancies that will not only bring their organization value, but will do so with the lowest possible risk of anything going wrong. Factors that buyers will assess in this area include financial performance, for example high gross margins, the amount of fragmentation in the proposition or services and the mix between employees and associate staff

2. Strategic attractiveness: Buyers want to see value as a result of purchasing a consultancy and therefore examine the underlying drivers of value and potential for synergy. This covers areas such as whether the target is operating in a sector which has clear drivers for the future growth of demand for consulting, whether the company’s client base is attractive and if the company is scarce or a ‘must have’

3. Shareholder alignment: Different businesses have different ownership structures. The breadth and depth of shareholder support, as well as the extent to which the ownership structure supports a transaction, all impact on when a firm is ready for a sale. For example, if there are 10 shareholders with 10% each, this is a very different proposition compared to one shareholder who holds 100% of the company

4. Sustainability of performance: Preparing for and going through a sales process is a lot of work and can have an unwelcome impact on a firm’s profitability if it is not managed well. This process cannot be allowed to affect the business-as-usual operations, as a firm needs to continue to grow. Areas under consideration will include how stable the employee base is, how much forward visibility versus budget the company has entering the sale process and what the likely impact of the process on business development will be

5. Deal support: This is the capability of the business to support the deal process. There are only so many hours in the day and if the managing director is also the financial director and the sales director, then chances are that they are not going to have the time to be able to deliver what is required by the due diligence process within the required timeframes. Buyers also look at other factors, such as the ability of the target to quickly and efficiently update its view of operational performance as well as future performance

6. Transaction preparedness: How ready is the company to enter the deal process? Buyers will want to kick the tires and probe all aspects of the business. If they pop open the hood on the financial department and find it’s a disorganized mess, then they are likely just to walk away. All aspects of the business must be tidied up so that not only are there no nasty surprises, but there is a clear case of the benefits to the buyer of acquiring your business.

We will be looking at each of these areas in turn and providing more detail in future blogs. So if you’re interested in gauging if your consultancy is ready to sell, please check back with Equiteq Edge regularly.

If you are preparing to sell your consulting firm and would like to discuss your plans, please get in touch.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.

10 critical success factors for earn-outs: Part 2

The process of growth of income

In one of our recent blog posts we outlined why earn-outs are commonly used by buyers and looked at the first 5 considerations  to take into account when thinking about an earn-out. This week, in part 2, we look at the final 5 aspects to reflect on when it comes to earn-outs.

6. Set a realistic time period

The effluxion of time means that an earn-out is at risk from the vagaries of market conditions, customer losses, technological advancement and increased competition, to name just a few factors. A 2 or 3 year period is typical – obviously the shorter the better for a vendor. Our research highlighted that while the average length of earn-out was just less than 3 years, prolific buyers (those who bought more than 2 businesses per year) were more likely to prefer a shorter earn-out period. Knowledge of buyers’ behavior is invaluable in these negotiations.

7. Limit the basis of an earn-out to aspects of the business you can control post deal

For example, if your business is heavily reliant on marketing spend to achieve sales growth and post transaction you have no control of the marketing budget, then immediately you are putting the achievement of your earn-out at increased and unnecessary risk. A full assessment of the transaction situation pre and post deal will highlight any areas of concern.

8. Corporate overheads

Be aware of any ‘costs’ which might be added to your P&L by a buyer post transaction and which could limit your chance to achieve your targets. Knowing how a buyer will behave post transaction and getting these issues on the table for discussion early is a key role for any advisor.

9. Tax treatment

With any performance-based payment there is a risk that the tax authority in your jurisdiction will look to treat it as income rather than capital with the attendant increase in tax that comes with it. Get good tax advice early.

10. How should it be structured?

All or nothing earn-outs don’t tend to work, so typically a sliding scale with caps and collars to penalize underperformance and reward over performance are the norm. A thorough understanding of whether the buyer’s aims are purely financial or whether they are mostly strategic has an impact here.

Will it be possible to catch-up payments later? How is performance to be measured – quarterly, annually, on average?

There is considerable scope for an earn-out to go wrong which is why it’s important to get external advice on how to best structure them. Understanding the motivations of a buyer and then formulating a structure which meets those expectations, whilst protecting you as a vendor, is the ideal scenario. A buyer will want an earn-out to be achievable and so will take guidance from the vendor and their advisor about how best to structure it as a win-win.

To read the full article this blog is based on please click here.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.

10 critical success factors for earn-outs: Part 1

Earn-outs Cropped

If you’re planning on selling your consulting firm, it’s highly likely that the transaction structure will contain an earn-out. In fact, 90% of deals involving consulting businesses will have a structure which includes some sort of deferred payment, with most taking the form of an earn-out. Your objectives would normally be to maximize the up-front cash percentage and alleviate the earn-out terms. Therefore it is worth being aware of the complexities associated with earn-outs and having access to the knowledge which will allow you to structure it in the most sensible and beneficial way. Our Buyers Research has a chapter on earn-outs and you can access the report here.

Earn-outs can be used by a buyer for any number of reasons but some of the most common are:

  • To obtain commitment from the vendors post transaction
  • To introduce specific targets which are non-financial to ensure a smooth transition post deal
  • To mitigate a valuation based on the delivery of a high growth forecast
  • To lower the day one funding requirement; and
  • To bridge a gap in price expectations between vendor and buyer by allowing a higher headline value

Earn-outs are not one-size-fits-all and must be tailored for specific circumstances. However there are 10 over-arching considerations that should be taken into account. We’ll be looking at the first 5 in this week’s blog, with the final 5 to follow next week.

1. What should the earn-out target be?

Set it too high and it becomes a disincentive, too low and it won’t be incentive enough. The target should be achievable for the vendor and provide a mechanism which ensures good value, driving the right behaviors for the buyer.

It is difficult to provide qualitative advice on what a target should be as clearly every situation will be different; however you should consider the following:

  • Base the earn-out on your existing organic business plan as you should be able to deliver this as a standalone entity, and it should only be enhanced by the buyer’s infrastructure and client base – assuming minimal interference in the way you run the business
  • Whilst it is usual for a buyer to want to have a cap on the earn-out, it doesn’t normally make commercial sense for either party as the additional consideration from exceeding an earn-out is usually self-funding. Get a thorough understanding of what the combined business opportunity is, and use this to assess the risk of hitting earn-out targets
  • Conversely, ensuring you include adequate downside protection within the earn-out is also key. This should ensure you still receive some value from it, even in the case of missing the target. However, for obvious reasons, this is a much more sensitive discussion
  • Avoid linking large proportions of the earn-out to specific targets with binary outcomes

2. Avoid complex, many-variable structures

Complexity of earn-out structure makes it very difficult to negotiate and document legally during the transaction, and also difficult to measure post transaction. The result is excess negotiation during the process and subsequent arguments post deal.

Trying to make an earn-out achieve many different outcomes is fraught with difficulty. At its most simple an earn-out should drive behavior which creates value and growth for the acquirer.

3. What happens if you leave?

Ensure you know what happens to the earn-out payments if you have to leave part way through, either through your own choice or a forced exit. There are many ways to ensure that you are protected in this case.

4. Consider the implications to the integration process

Earn-outs can sometimes be a hindrance to integration of the vendor’s business into the buyer as typically the vendor’s business needs to be ring-fenced from a reporting and operating standpoint in order for the earn-out to be measured. This can destroy value for the buyer and also completely undermine the original rationale for undertaking the acquisition in the first place.

5. Earn-out payments rely on the financial viability of the buyer

Being satisfied that the buyer will still be solvent at the end of the earn-out period, or including protections in the sales documentation, is key.

Check back in next week for the second 5 critical factors for earn-outs. Or if you can’t wait, please view the full article this blog is based on here.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.