How to put margins at the center of your business

There’s perhaps no topic more important for consulting firms than improving profits. Because of this, we recently ran two 30-minute webinars on improving margins. This week, we’re looking at questions asked during the first of these, which explored how to put margins at the center of your business.

If 20% EBIT is a good target for a consulting firm, would a firm achieving 40% EBIT be viewed as considerably more valuable?

At face value, a 40% margin business might appear more valuable, but it depends on whether the buyer considers this sustainable.

Some will interpret a margin of this size as indication that the firm has under invested in itself and will discount this. Because of this, we typically recommend that 50% of revenue be spent on the delivery of your services and 30% should be allocated for overheads – such as selling or marketing the business, admin costs or recruitment or IT fees – leaving the remaining 20% for EBIT.

Firm owners might be wise to consider investing any EBIT above 20-25% into growing the top-line instead.

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Why giving away parts of your business could accelerate your growth. Seriously!

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By Jason Parks, Director – Strategic Advisory Services, Equiteq.

Equiteq hosted a webinar on why equity incentivizing your key employees can improve equity value. In this blog, we take a look at some of the questions asked by attendees.

  1. I’d like to motivate my Managing Directors, but I’m nervous about giving too much away.

It’s a mistake to simply view equity schemes with key employees as good as giving away your business.  When done correctly, they can help you grow your consulting firm faster, thus increasing your equity value. Think about it: it’s better to own 70% of a $10m business than 100% of $3m company.

Managing shareholder dilution is important, but I would encourage you to first consider how to get your key personnel aligned with the shareholders’ interests and objectives. That starts with having a clear plan in place.

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Answering your questions on Intellectual Property (Part 1)

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We recently held 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’ve been sharing and answering these questions in a series of blog posts. This week we’re looking at the questions asked during the webinar on how well-managed intellectual property (IP) can enable your consultancy to scale and command a premium price at sale.

1. Can you explain further about the need to protect IP trade secrets and yet still provide the depth of information necessary to market the business?

It is important for consultancies to share high-quality articles, presentations, reports and materials with clients and prospects. Doing so will help consultancies demonstrate industry knowledge and domain expertise. A large percentage of your IP should be readily available to prospects and other stakeholders.

But how do you control access to trade secrets? The foremost priority for any consultancy in such a situation is to understand: (a) who needs to know (b) who needs to have access and in what format? (c) who controls the access to these trade secrets? While there isn’t a shortage of senior executives in charge of marketing, operations, etc., it surprises us how many consultancies fail to assign someone to manage IP. Therefore, appoint a senior member of management to control IP and make sure that they come up with a plan to address the considerations above.

To guard against the misuse of IP firms should make use of non-disclosure agreements and non-compete clauses in employment contracts for when employees leave the business. Internally, consultancies should make clear to staff what it considers IP and train them on how to use and store it safely. Then, the company should enforce this rigorously within the organization.

Why not click here to learn more about how to build intellectual property to drive equity value in your consulting firm.

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Sales and profit growth (Part 2)

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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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Sales and profit growth (Part 1)

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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 first 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.

  1. What is more important in terms of growth – revenue or profit?

The answer is both! Ideally a buyer wants to see that an acquisition target can grow the top line while maintaining the profit margin at a healthy level (around 15% – 20% for most consultancies). Some consultancy buyers may pay closer attention to revenue growth, as this shows scalability of the business and post-acquisition, the profits will change as the target firm is integrated with the buyer’s business. However, profits are important as the key value indicator and if profits are declining, this may cast doubt on the way the firm is managed and whether the acquisition will be value-enhancing for the buyer in the short term.

Buyers are always looking to exploit potential synergy and scope for further growth, and they will ideally look for both revenue and profit growth as indications of market demand and good management respectively.

Ultimately, consultancy buyers are only interested in growing consultancies; one year of negative growth can set the clock back on the optimal time to sell the business.

Click here to find out which of your revenue streams are the most valuable to a buyer.

  1. What percentage of revenue should be allocated to marketing? Is there a cap?

It isn’t necessary to have a cap on marketing; however, every firm must learn to manage the amount of demand it wishes to create in line with its ability to deliver on the projects it wins.

For instance, if your firm is going through a period of high utilization and is working close to capacity, then you might want to hold back or slow down your marketing spend for future campaigns. The key is to do this without risking a dry pipeline once your capacity becomes free. Creating demand for services which you are then unable to deliver can be damaging for the business, so it’s important to balance your sales and marketing spend.

  1. Earn-outs are common when buyers acquire services firms. Can they be avoided?

It is true that earn-outs are very popular with services consultancy buyers. This is because these types of buyers usually aren’t buying transactional assets; they are buying people and their capabilities. The risk is that if all of the money is paid up front, owners and stakeholders can leave or become less motivated to continue to deliver. To alleviate this risk, buyers offer earn-outs.

Sometimes, to make the proposal more competitive, buyers would offer a differently balanced earn-out without increasing the value of the overall offer.

But, while earn-outs seem to be the norm, they are by no means absolute. It is not unusual for non-consulting buyers to acquire a consultancy outright.

The second half of the blog will be published in the coming weeks.

To sign up to listen to a recording of this webinar, please click here. To view other webinars in the series, please click here.

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.

Nurturing client relationships to support equity value growth

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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 questions asked during the webinar on what you need to know to nurture your clients in order to grow mutually beneficial long-term relationships.

  1. How do you build long-lasting client relationships with a small team?

Every company starts with a small team. Which is why, as a business owner, it is very important that you remain disciplined about where you invest your time. Business owners cannot afford to spend all their time delivering services, but should focus some of their efforts on managing client relationships. Otherwise, the organization will never grow.

A good tip is to book time in your diary to speak with your client sponsor and other important stakeholders once a week. To make these meetings worthwhile, update them on project progress and give them insight into some of the wider hot topics impacting their sector. You could also invite the important stakeholders to your project review meetings once a month so that they can see first-hand the benefit you are delivering. At this point, do not hesitate to ask your clients for referrals.

Click here to find out if your client relationships are building or stunting your firm’s growth.

  1. When should we invest in a customer relationship management (CRM) system?

Because a CRM system is an automation tool, it is important that the underlying process of data capture is sufficient to keep the CRM data up-to-date and relevant. Similarly, if the CRM system offers more functionality than you need, the whole application can become too cumbersome to manage.

For smaller consultancies, it is perfectly acceptable to manage your client data on spreadsheets. But as the organization grows, a simple spreadsheet will no longer be able to cope with the growing number of clients, client relationships, business offerings and activities.

It would be unusual for a business with yearly revenue of more than $3 million to manage without a CRM system. Given that the service and software is available by seat, it can be very affordable.

  1. How do you manage relationships with your clients that only need your services every three years or so?

It is common for a consultancy, such a strategy house, to work with a client intensively for a number of months and then move on. However, three years is a long time not to keep in touch with a client or sponsor. Things in organizations can change very quickly, and it is important that you find a way to keep going back, so they keep your organization front of mind.

At the simplest level, you should schedule a time to speak with your sponsor every few months or so; again, go back and share your thoughts on hot topics in the market.

You might want to consider setting up a networking organization or community of clients. This will give you a reason to keep in touch with them and other important stakeholders in the sector you operate in.

  1. Would you ever really decide to walk away from a client?

It can be painful walking away from a client. However, if a client is too expensive to service, because of geographic barriers for instance, it may well improve your consultancy’s profits by choosing to no longer work with them.  Another reason for exiting an opportunity is if a client’s sector is not core to your business offering or if there isn’t any real potential for business growth.

The best way to run a consultancy is where demand for your services is slightly higher than your actual capacity. If you are in that situation, it is easier to walk away from clients that are not beneficial in the long run.

Finally, as with all of our webinars in this series, our key takeout is presented in our Start, Stop and Continue strategies. To immediately improve client relationships:

Start:           Classify your accounts and appoint managers for the key ones

Stop:            Stop spending all your time in the key accounts on delivery only: make time for account management. Stop spending any senior management time on the exit accounts

Continue:     Updating your sales pipeline with forecasts from your client accounts

To sign up to listen to a recording of this webinar, please click here. To view other webinars in the series, 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.

Growing equity value webinar series: Consultant loyalty

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Lately we’ve been running a series of free 30-minute webinars to help attendees grow the equity value in their consultancy firms. 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 questions asked during the webinar on how to create the right organizational culture that embeds consultant loyalty and attracts the right buyers.

  1. How would a potential buyer evaluate our culture?

There are a number of ways a firm projects its culture externally. Think about the company’s public face, its mission statement, its website, company values, written content (i.e. blogs, articles, whitepapers), awards the firm and its people have been recognized for. These all provide an external party with a window into the culture of the business.

A really good example of this is how your firm recruits new employees. The manner with which you describe the profile of your ideal candidate, where you recruit and the language used are all indicators of the culture within the organization. These are just some of the things a potential buyer would research before approaching your firm.

Once a potential buyer engages in due diligence there is an even greater focus on culture from this initial ‘outside in’ look, because a buyer is looking for areas of compatibility and areas that will prove challenging to a smooth integration after sale.

You can read more about what deters buyers of consulting firms here.

  1. Would buyers replace your consultants with their own after sale?

Buyers are always keen to protect a company’s assets. Assets are more than just a firm’s intellectual property, but the client relationships, future sales pipeline and staff competence. These are all crucial to a buyer.

Research has shown that less than 50% of mergers realize their intended value and synergy. So there is an acute need, on the buyer side, to make sure the integration between the companies delivers the intended strategic extension to their existing offering. Getting rid of staff will likely hinder this objective.

Click here for more information on what to expect from consulting buyers following an acquisition.

Finally, as with all of our webinars in this series, our key takeout is presented in our Start, Stop and Continue strategies. To immediately improve consultant loyalty in your consultancy:

Start:           Thinking of culture as an intangible asset which should be actively managed

Stop:            The traditional carrot and stick approach to performance management

Continue:     To create a culture which attracts, motivates and develops by offering autonomy, meaning and purpose.

To sign up to listen to a recording of this webinar, please click here. To view other webinars in the series, 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.