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Growing & realising equity value in consulting firms

How to Grow and Sell

a Consulting Firm

A Q U I C K G U I D E

How to Grow and Sell a Consulting Firm 1 of 10

Introduction

This guide is aimed at owners of small to medium sized

businesses in the broad consulting or professional

services sector. These are people businesses where the

sale of ‘time’ is the overriding objective of the company.

Its purpose is to persuade you that there is a proven

process to build a consulting business with strong

cashflow and sustained profit growth. This creates a

valuable asset and a wealthy future for you through

the realisation of your equity using one of the exit

options available.

The reality is that most consulting firm owners are

conditioned to believe that it’s all about fee income, that

there’s no equity value in a people business, and you

work until you drop, content (or discontent!) with an

annual income. In this guide we are going to dispel that

myth and show you how to maximise the value of your

firm and make it attractive to investors. So read on if

you want to earn a healthy salary, achieve cash flow

growth, AND capitalise on the equity value of your

firm by selling up one day.

First, let’s whet your appetite by highlighting the deal

values for consulting firms in the M&A market, identify

where your buyer may be coming from and introduce

the most important equity value driver to focus on.

Later in the paper you’ll learn about ‘the 8 levers of

equity value’, and the factors used in the valuation of a

consulting business, all of which will help you build your

equity growth plan and enable the sale of your firm for

its maximum value.

So what’s my firm worth?

It’s probably the question on the tip of your tongue, so

let’s deal with it first! There are many factors involved in

a valuation, however in simple terms your firm is worth

a multiple of the last twelve months profits or revenue.

Based on our own market research and direct

experience of selling consulting firms, the average

pre-tax profit (EBIT) multiple over the last 5 years has

been 10 and the average revenue multiple has been 1.1.

Furthermore, many people believe that mergers and

acquisitions are only for the big players. This is not true

as about 75% of all deals in the consulting sector are

valued at less than £30m. In fact £4m is the most

popular deal size, so good quality small firms are always

in demand.

Don’t run away and put down a deposit on your Ferrari

yet! There are big variations in the numbers, for example

the average EBIT multiple may be 10, but the range

goes from 2 or 3 to 40 and there are many other

factors to consider for the particular circumstances of

your firm and the market conditions at the time of sale.

The recession in 2009 will inevitably reduce the market

premiums we’ve seen in the past few years, however it

all comes down to how hungry a buyer is for your firm

and what they’re willing to pay for it!

As we will go on to explain, the real value of your firm

is in your ability to reliably predict profits into the future.

If you have an ambition to sell, then the ideal approach

is to benchmark your current value, assess the profit

risks in the business (using the 8 levers of equity value

below) and systematically work on strengthening each

lever to build value over time.

© Copyright Equiteq LLP 2009

How to Grow and Sell a Consulting Firm

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Who would want to buy my firm?

There are two main types of investor that could be

interested in you; other consulting firms or service

businesses (trade buyers) looking to bridge a gap in

their growth strategy and those coming at it purely

from a financial perspective, such as Private Equity.

A trade buyer could be interested in you for a number

of reasons:

• You’re a competitor that will give them scale

• You occupy an adjacent competency space they

want to fill

• You operate in a geography that they need to cover

• You have sector expertise where they don’t

• You have client relationships they can leverage.

Financial investors, like Private Equity houses, are always

looking for a better return on their capital and larger

mid market firms are being targeted because well run

consulting businesses have a reputation for healthy

profits and good cash-flow. Compared to other sectors,

consulting service businesses don’t suffer from the same

kind of working capital demands, so there’s plenty of

free flowing cash to play with. This means they can use

debt as part of the purchase structure, the so-called

‘leveraged deal’, and provide great returns to their fund

providers. You may be surprised to know that in 2006

Investment Houses overtook Trade Buyers as the largest

buyer type of consulting firms, however the recession is

causing the pendulum to swing back the other way.

Where’s the equity value in a people business

like consulting?

OK, so we hope you’ve bought in to the fact that the

consulting industry M&A market is very active and

quality firms sell for good prices. If you’re ‘investment

ready’ there’s a real possibility that you could sell your

firm in the next twelve months, and if you’re not, now’s

the time to put your equity growth plan in place and

prepare for exit in the next few years. So how do you

build equity value in a consulting firm and maximise

your multiple?

At first sight, a casual observer would place very little

value on a ‘people business’ as it would appear that all

the assets of a consulting firm reside in very mobile

people and laptops! However, as we said, in simple

terms your firm is worth a multiple of the last twelve

months profits and if you can convince an investor that

those profits will continue, or indeed grow over time,

then you have equity value in your firm. If you can’t, then

the value may indeed be low.

So the key to equity value and the multiple applied to

your firm is in your ability to reliably predict your future

sales and profits AND show that the risk of you failing

to achieve them is low. Therefore the most important

equity growth factor by far is the creation of a sales and

marketing process that delivers a healthy business

pipeline and de-risks the traditional feast and famine

issues often found in consulting firms.

Sales and Marketing Process is crucial, but on its own

it’s not enough. There are seven other factors, each of

which will either increase or decrease the probability

of your firm delivering robust profit growth and impact

your value multiple.



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We will cover the ‘Eight Levers of Equity Value’ next and

this will give you a framework for an equity growth plan

for your firm. Meanwhile let’s just summarise what we

have said so far :

• The consulting M&A market is very active and quality

firms are in demand

• Trade buyers and investment houses are the most

active buyers

• The 5 year average profit (EBIT) multiple at the time

of writing is 10

• Your equity value is based on a multiple of your last

12 months profits

• This assumes you can reliably predict profits into

the future

• And finally…

You can increase your value and personal wealth using

the eight levers of equity value.

The ‘Eight Levers of Equity Value’

So let’s look in more detail at the factors that create

equity in a consulting firm using a model we call the

‘Eight Levers of Equity Value’. We use this model to

help value a business, but we also use it as a planning

tool to drive the growth in profits and equity value of

your firm in the right direction. It does this by focussing

on the factors that drive consistency in profits and

reducing the risk in your business. Even if you’re a small

firm with entrepreneurial flare, this is an opportunity to

build for the future and start as you mean to go on!

Let’s just recap…in simple terms your firm is worth a

multiple of the last twelve months profit and when

someone invests in your firm they’re gambling that

profits will continue, or indeed grow over time.

Therefore if the risk assessment is high, then the

multiple will go down, if it’s low it will go up. The Eight

Levers of Equity Value model is used to assess the risk,

so if you get them right you’ll drive up your multiple and

build a real pension fund. Get them wrong and you may

have to live off your annual income for a long time!

Each lever is an area of opportunity to either increase

or decrease the probability of your firm delivering

predictable and robust profit growth. By assessing your

performance in each lever and giving it a weighted score

(some levers are more important to buyers than

others), an overall risk factor can be developed. This is

then applied to the current multiple for the prevailing

market conditions to determine an equity value for

your firm. Also, by benchmarking your performance in

each, you can create an improvement plan to fuel

growth and therefore increase equity value relative to

profits over time.



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So what would a buyer be looking for in a

quality firm and what should you be striving

for in each lever to grow your equity value?

1. Sales and Profit Growth

Can you show a consistent growth in revenue and profits?

This is the primary driver of equity value and a firm

with a track record of erratic revenues and profits sends

a concerning message to buyers and investors, so if you

can show sustained revenue and profit growth AND

high margins, you have an attractive proposition. Before

you take you firm to market, you want to be able to

demonstrate consistent growth over the last three years.

Sales and profit growth is a reflection, or an output of

your performance in the other seven levers and as we

said, the most important factor is your Sales and

Marketing Process.

2. Sales and Marketing Process

Can you predict top-line sales revenue with accuracy?

If you can then there’s a high probability that you can

forecast profits, which is why a quality sales and

marketing machine is vital in the valuation equation,

because it delivers a healthy business pipeline and de-

risks the traditional feast and famine issues often found

in consulting firms. If you leave all your sales and

marketing activity to a small number of rainmakers, or

serendipitous sales opportunities, then you’re hostage to

a group of very mobile assets and your sales pipeline

will be vulnerable and unpredictable.

Investors want lead generation to be independent of

any individual, with automation embedded into the sales

and marketing process. A marketing-led firm, where

prospects are attracted through a balance of ‘pull

marketing’ and ‘push sales’ is more likely to deliver a

robust sales pipeline. Overall they want a culture where

sales and marketing is seen as an investment and not a

cost, and by ‘cranking the marketing handle faster’ you

can drive more sales and cash into the business.

3. Market Positioning

Does your value proposition provoke a ‘WOW’ or

a ‘so what’?

The more unique, compelling and targeted your value

proposition, the better you can demonstrate that your

firm can command market attention with greater ease

than its competitors and the higher you can push up

your fees. If you’re in the ‘me too’ zone, then the risk of

future profits is higher because competition risks are

higher and you have to fight harder for business.

Quality firms with a strong ‘unique value proposition’

tend to have robust processes around such things as

market research, competitor analysis and win/loss

reviews. Notwithstanding your magnetism to the market,

a clear value proposition helps you stand out in the

crowd when a buyer is hunting for a firm like yours!

4. Management Quality

Does you leadership team work ‘on’ or ‘in’ the business?

An investor wants to see a balanced, experienced

leadership team with a track record of delivering results,

working in an environment where they spend more

time working ‘on the business’ rather than in it! If this is

happening then the firm is likely to be innovative,

focused, and tightly managed with good KPI

measurement and financial control. If the management

style in the firm is right then not only will your buyer

see effective processes, but they will also see people

willing to go the extra mile when they interview key

personnel in the delivery team.



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5. Client Relationships

Do you have a well managed contact base and low

client attrition?

Quality of client relationship management extends from

your account planning methods to the way you nurture

influencers, decision makers, dormant clients and old

contacts. Good firms employ methodologies like Miller

Heiman’s Large Account Management Process (LAMP)

to protect and grow strategic accounts; they use a CRM

or contact management system to assist in relationship

development with individual contacts. Quality processes

such as these enhance your ability to acquire, retain and

build a client base, increase the revenue per client and

improve the quality of your fee income.

6. Quality of Fee Income

Do you have long term contracts and no bad debt?

If a good percentage of your future fee income is locked

in through long term contracts (12 months or more)

with a number of clients, then you’re in the right place.

Investors like to see a diverse client portfolio (not too

many eggs in one basket) with fee income growth

balanced across existing clients and new business. Add

to that a quality approach to billing and debt collection,

resulting in zero bad debt and low to zero working

capital requirement, then you have a very strong card

to play with investors!

7. Intellectual Property

How much IP is in your very mobile people and laptops?

A systematic approach to innovation, knowledge

management and IP building will make your firm more

valuable because it de-risks the acquisition from the

buyer’s perspective. Their vulnerability to losing people

post-acquisition is less a threat and it makes the firm

more scaleable if IP can be ported to other resources.

Also, effective IP development and management

improves your market position by raising the height

of the bar for competitors.

8. Consultant Loyalty

Can you stop your equity from walking out the door?

There’s no point in winning all those new deals if you

can’t provide the skills and manpower to deliver, so you

need an environment people want to work in, where

they get recognition, reward, personal development and

have fun. If you create this environment, then you’ll be

more likely to hire the best people to keep your

business growing and reduce their desire to take the

next head-hunter call! Also, if you’ve locked your key

staff into the future of your firm through profit-sharing

and share options, then you’ll have a team where all are

focused on the equity growth of your firm and its future

acquisition. This is probably one of the harder issues for

an owner to grapple with…the thought of giving up

equity in return for a bigger pie at the end of the line!



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OK so far? If you need to, stop forbreath and have a cup of coffee!

Now we’re going to complete the picture by looking

at the most important qualitative factors influencing an

investor’s perceived value of your business and discuss

the key considerations in taking your firm to market.

What does a well run firm look like to

an investor?

As you now know, consistent and reliable growth in

profits is the main driver of equity value, so if you can

forecast top-line sales revenue with accuracy then

there’s a high probability that you can forecast profits.

That’s why the quality of the sales and marketing

machine is vital in the valuation equation.

The most important factor in maximising the value

of your consulting firm is your ability to forecast

sales revenues.

Firms without a good quality sales and marketing

process cannot reliably predict sales revenue, in fact

some don’t have a sales and marketing process at all.

In the typical small consulting firm, sales happen

serendipitously through a process that can best be

described as 'network selling'. This is good, but it’s not

enough on its own. There’s too much of a reliance on

people and referrals, which increases the risk of ‘feast

and famine’ and saw-tooth sales revenues. Firms with

this approach to sales and marketing present a very

risky profile for an investor because of their complete

reliance on erratic and unreliable sources for their

sales pipeline.

On the other hand, a marketing led firm with a

well-oiled machine independent of any individual can

usually show a healthy, growing pipeline because of the

mechanised, multi-channel, campaign orientated and

measured approach to lead generation. Companies like

this would be able to attract a premium price from an

investor and if they are at the top end of the scale, they

will be able to demonstrate the following:

Qualitative factors attracting

premium valuations

There are four main key performance indicators (KPIs)

that would be taken into account in a valuation:

• Pipeline – A premium value would be placed on

a firm with 75% of its pipeline as business booked

over the next 3 months and 50% booked over the

next 6 months

• Sales Growth – 15% consistent year on year

growth would be viewed as strong, but 25% would

win a premium valuation

• Repeat Business – A firm with 80% repeat business

would be seen as strong and 90% would win a

premium value

• Client Relationships - a valuation would increase

where long term client relationships are prominent

and a discount would be applied if too many eggs

are in one basket in terms of client concentration.

It’s important to understand that valuation is not

a science, and other factors such as synergy with the

buyer have a major influence, so the figures above

should be taken as guidelines. However, a firm’s ability

to demonstrate numerically the growth and repeatability

of sales is always going to attract higher multiples.

Conversely, those that can’t demonstrate robust

processes in sales and marketing may never achieve

a sale or investment!



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So let’s assume you are able to present a positive

picture and well placed to take your firm to market.

How do I find out if my firm is attractive

to buyers?

Talk to advisors like Equiteq who have experience in

mergers and acquisitions and people who have bought

and sold consulting firms. They will know the market,

and how to evaluate the attractiveness of a firm of your

size, market and services. They will not only take into

account how similar companies have sold in recent

times and the current demand for companies with your

services/niche/geographic markets, buyers will also be

willing to pay a premium for firms with a high degree of

synergy to themselves. If a buyer really wants what you

are selling and you are the perfect strategic fit, then you

can achieve an even higher price for your firm.

Remember to be calculated and cautious in the early

stages, you can’t take every positive conversation too

seriously. You may hear a lot of flattery when you put

your firm on the market but the most important

thought to keep in mind is the golden rule of selling

your firm - ‘one buyer - no buyer!’ and aim to achieve a

bidding contest for your firm.

When is the best time to sell?

In an ideal world, the best time to sell is when the

following three areas are in line and on the increase:

• A peak in market activity

• A peak in your own profits

• A peak in your market sector.

If these three things coincide and you go to market at a

time when you have an excellent sales track record and

clients are singing your praises, then you stand a very

good chance of getting a premium value for your firm.

However to achieve a confluence of all three peaking

areas at the same time is not always realistic, and there

are many personal factors to take into account on the

timing of an exit. Sometimes it is better to do a deal

now, rather than work hard for another 3 years. You

may well be able to push up your valuation, but does

that trade well against the uncertainty of what may

happen in the elapsed time and would you be better

off with cash in the bank now?

What are the various exit options and how

do I choose the right one?

There’s a wide range of options to sell your company

or release equity value, but there are five main routes

available to you.

1. Trade Buyer – Usually a strategic acquisition by

another consulting firm, or services business who

believes that your firm can further its growth ambitions,

possibly by extending their geographic footprint,

widening their service portfolio, or increasing capacity.

2. Investment House – This is usually a purely financially

motivated investment. There are a growing number of

Private Equity houses who now see consulting as a

good market to invest in because of its reputation for

high profit margins and low capital requirements, thus

delivering a good return to its investors.

3. Debt re-structuring – This is where bank debt is

used to re-structure the shareholding, resulting in cash

available to founder shareholders and a larger

shareholding being distributed to smaller shareholders.



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4. Management Buy-Out (MBO) - This is when some

of your senior team raises capital from third-party

investors or banks to buy out the founder or other

larger shareholders.

5. Stock Market Floatation – An option for bigger

companies is to float the business on the stock market.

This would require a fairly large sales turnover figure to

qualify and it varies by stock market, but would probably

require at least £50m sales turnover as an entry point.

So, how do you choose?

Size will rule out some of the options but you need to

consider if want to sell out completely or be involved

at the next stage of growth? If you want to sell out

completely and move on, then selling to a trade buyer

who will take on your firm lock, stock and barrel could

be the option for you. If you only want to relinquish

part of the business, then perhaps look at a private

equity investor or a bank. If this is the case, ensure you

redistribute your shareholding so that your Management

Team is motivated to continue to work hard and do

their best for the business during any changes.

How do I prepare for a sale?

Preparation is the key because if a buyer’s due diligence

discovers nasty surprises then the deal could be

jeopardized or your firm could be devalued. It will

normally take about 3 to 6 months to get your firm

prepared for sale and it will be a big distraction to

normal business. So it’s a great opportunity to make

use of Chairmen, Finance Directors etc. Get them

to go through things with a fine toothcomb whilst

the management team stays focused on growing the

business. Clearly this is also when you should be making

use of external experts in the Consulting M&A field

in order to both maximize price and increase the

chance of a successful outcome. Our Equity Growth

Accelerator valuation and profit growth model is

designed to simulate the scrutiny of a buyer in fine

detail and has proven to be an excellent tool for

assessing the risk before taking your firm to market.

There are two main areas to focus on

to reduce the risk of nasty surprises,

Operations and Finance:

Scrutinize and clean up all your operations by

removing any negative issues, or implementing quality

changes that will reinforce future profits. This may

include removing errant shareholders or employees,

dealing with impending litigation, streamlining teams, or

ensuring that client, supplier and employee contracts

are sound and in place.

It’s vital to clear out any dubious assets or expenses,

such as private yachts, or odd payments to people who

aren’t strictly employees! Keep it legal and make sure

your accounts are squeaky clean.

Finally, and this is most important, whilst sharpening the

act, clearing skeletons out of cupboards and making

things nice and transparent, make sure you have a

strong sales pipeline to back up your profit forecast –

otherwise you won’t be going anywhere! However if

you follow the path we’ve recommended in this guide,

you could be looking at a very wealthy future along

with the other shareholders in the business.



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Summary:

The main points we’ve discussed in How to Grow

and Sell a Consulting Firm:

• In simple terms your firm is worth a multiple of

your last 12 months profits

• Valuations of 7 to 10 X EBIT is a realistic

expectation for a well-prepared firm

• The lower the risk of profit growth the higher

the valuation

• Use ‘The Eight Levers of Equity Value’ to grow

your firm and reduce risk

• The most important factor by far is a robust sales

and marketing machine

• There are a range of exit options, choose the best

one for your circumstances

• Good preparation is the key to ensure a smooth

route to a successful sale

How to obtain a valuation and create an

equity growth plan

If after reading this guide you want to explore your

growth and exit options, please contact:

Tony Rice on +44 (0)1252 724264 or

[email protected] to arrange a confidential

discussion with one of the Equiteq partners.

If we decide to work together, we would start with a

2 day workshop with you and your team where we:

a. Performance benchmark your firm across the 8

levers of equity value and 80 best practice metrics

b. Produce a valuation and explore future equity

realisation options

c. Identify profit risks, strengths, weaknesses

and opportunities

d. Identify short term wins for sales and

profit growth

e. Prioritise the most important actions for highest

financial gain in the shortest period of time

f. Agree how we would support your growth

through to a future exit



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Further Information

Download Equiteq’s free research report,

The Consulting Industry M&A Report. This is available

on our website at www.equiteq.com, it shows trends

in the market and provides other useful information

to owners of consulting firms anywhere in the world.

Find out more about the Equity Growth Accelerator

valuation and profit growth model by downloading

the briefing pack at www.equiteq.com/ega

About Equiteq

Equiteq LLP provides merger, acquisition and growth

services exclusively to the consulting and IT services

industries. We help investors to find and acquire their

ideal company and SME consulting firm owners to

grow profits, equity value and successfully sell their firms.

We are different to most M&A or corporate finance

organisations because we have:

• An exclusive, in depth focus on the professional

services sector

• Ourselves built and sold a firm to £63m with

350 consulting staff

• A proprietary database enabling us to match

buyers and sellers together

• A proven methodology for sustained profit and

equity value growth

• A track record in selling people businesses



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