How To Grow and Sell A Consulting Firm

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Growing & realising equity value in consulting firms
How to
Grow and Sell
a Consulting Firm
A QUI CK GUI DE
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 its all about fee income, that
theres 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, lets 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 youll 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 whats my firm worth?
Its probably the question on the tip of your tongue, so
lets 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.
Dont 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 weve seen in the past few years, however it
all comes down to how hungry a buyer is for your firm
and what theyre 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:
Youre 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 dont
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 dont suffer from the same
kind of working capital demands, so theres 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.
Wheres the equity value in a people business
like consulting?
OK, so we hope youve bought in to the fact that the
consulting industry M&A market is very active and
quality firms sell for good prices. If youre investment
ready theres a real possibility that you could sell your
firm in the next twelve months, and if youre not, nows
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 cant, 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
its 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 lets 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 lets 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 youre a small
firm with entrepreneurial flare, this is an opportunity to
build for the future and start as you mean to go on!
Lets just recapin simple terms your firm is worth a
multiple of the last twelve months profit and when
someone invests in your firm theyre gambling that
profits will continue, or indeed grow over time.
Therefore if the risk assessment is high, then the
multiple will go down, if its low it will go up. The Eight
Levers of Equity Value model is used to assess the risk,
so if you get them right youll 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 theres 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 youre 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 youre 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
Heimans 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 youre 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
buyers 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?
Theres no point in winning all those new deals if you
cant 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 youll 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 youve locked your key
staff into the future of your firm through profit-sharing
and share options, then youll 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 withthe 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 for
breath and have a cup of coffee!
Now were going to complete the picture by looking
at the most important qualitative factors influencing an
investors 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
theres a high probability that you can forecast profits.
Thats 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 dont 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 its not
enough on its own. Theres 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.
Its 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 firms ability
to demonstrate numerically the growth and repeatability
of sales is always going to attract higher multiples.
Conversely, those that cant demonstrate robust
processes in sales and marketing may never achieve
a sale or investment!
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So lets 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 cant 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?
Theres 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 buyers 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 its 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.
Its vital to clear out any dubious assets or expenses,
such as private yachts, or odd payments to people who
arent 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 wont be going anywhere! However if
you follow the path weve 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 weve 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
tony.rice@equiteq.com 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 Equiteqs 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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