Pick the right partner for your exit goals
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The document provides insights for consulting firm owners on the distinctions between selling to private equity versus strategic buyers, highlighting the implications, evaluations, and opportunities associated with each type of client. It discusses the advantages such as growth capital from private equity and revenue synergies with strategic buyers, along with key considerations for deal structuring, due diligence, and post-deal integration. Ultimately, it emphasizes the importance of choosing a partner that aligns with the seller's exit goals and business objectives.
Pick the right partner for your exit goals
- 1. Strictly Private and Confidential© Equiteq 2016 equiteq.com Growing equity, realizing value Learn which buyer could be right for you and how best to attract them. What should consulting owners consider when selling their business to these buyers?
- 2. Strictly Private and Confidential© Equiteq 2016 equiteq.com 2 Antonio Bonet. International Development Consulting. Sold. Selling to Private Equity vs. Strategic Buyers
- 3. Strictly Private and Confidential© Equiteq 2016 equiteq.com are investment firms investing private capital into businesses, which are typically held and exited after a hold-period. Overview 3 Selling your consulting firm to a Private Equity will have different implications for a consultancy than selling to a trade buyer. Strategic (or trade/corporate buyers) are non-private equity investors who have existing businesses which will typically make acquisitions which form part of their existing operations Private equity (or financial buyers) Attracted to consultancies due to: Relatively high profit margins High levels of profit to cash conversion The potential for high growth The barriers to entry that can be maintained through IP Returns can be risky since the company’s core assets (people) can walk out the door. And since most consulting work is project based, future forecasts are difficult to predict. Looking at opportunities to enable synergies: Expanding existing core services Adding complementary products, services Expanding geographic footprint Cultural fit Ability to easily integrate with their existing business
- 4. Strictly Private and Confidential© Equiteq 2016 equiteq.com M&A by Large Accounting Networks 4 Strategic Buyers The vast majority of deals are undertaken by strategic buyers. Accounting networks have historically been major acquirers, but listed trade buyers are becoming more aggressive, benefiting from rising quoted valuation metrics. Quoted Valuation Metrics of Listed Consulting firms (2007 to 2016)
- 5. Strictly Private and Confidential© Equiteq 2016 equiteq.com Private Equity Private equity are enthusiastic investors in consulting firms and have substantial capital available to allow you to grow and reach new markets and geographies. PE capital raise: Consulting-focused (2007 to 2016) Consulting M&A by Private Equity buyers (2007 to 2016) 0 25 50 75 100 $0 $20 $40 $60 $80 $100 $120 $140 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Billions Capital Raised Fund Count
- 6. Strictly Private and Confidential© Equiteq 2016 equiteq.com Considerations for selling your business 6 As the owner of a consulting firm, strategic and private equity buyers will offer you different opportunities. Ensuring you pick the right partner is key, but how do you know which one better fits your exit goals. Private Equity Strategic Buyers Evaluating your business and the buyer Standalone growth potential Synergy potential Cash-generation capability Integration and cultural fit Opportunities for investing growth capital and further upside Access to larger back-office support Career opportunities for your people Valuing your business & deal structuring Flexible funding options Majority buyout Financial gearing Mostly funded from earnings Equity & second bite of cherry Loss of control for cash and earn-out Due diligence considerations Efficient and disciplined Longer period (if not serial acquirer) Rigorous financial analysis and market diligence required Potential regulatory issues and anti-trust considerations Validating growth plan & exit planning Validating synergies and cultural fit Post-deal considerations Brand retention Integration / Loss of brand Periodic RoI reviews Periodic reviews of earn-outs Bolt-on opportunities and organic investment Long-term growth plan Exit after investment hold period One note of caution - these are typical buyer characteristics, but remember that all buyers are unique and cannot be completely categorized.
- 7. Strictly Private and Confidential© Equiteq 2016 equiteq.com 7 Evaluating the opportunities from each buyer Strategic buyers offer you the opportunity to generate cross-selling revenue opportunities, and financial buyers offer you the opportunity to deploy growth capital, which can be used to expand your business Expert strategic advice, market access through relationships and help you enter new markets or geographies. Retention of your firm’s identity and brand. Flexible ownership and more growth options, with a potentially bigger pay out. Immediate synergy opportunities with respect to cross-selling a broader set of services and products to existing clients and winning new clients. Integration and cultural fit are paramount to enable joint working. There are staff development and career progression opportunities for your people. A global platform to service international clients. You will also have access to a larger firms back office support and structure straight away. A private equity buyer could offer you… A strategic buyer could offer you…
- 8. Strictly Private and Confidential© Equiteq 2016 equiteq.com 8 How the buyer will evaluate your business Private equity will use more quantitative performance measures as often the qualitative measures used by strategic acquirers isn’t relevant to a financial buyer. Blend of qualitative versus metrics used to evaluate acquisition opportunities
- 9. Strictly Private and Confidential© Equiteq 2016 equiteq.com Private equity KPI expectations and target valuation metrics How the buyer will evaluate your business 9 Buyer research highlighted that private equity take a discerning approach to evaluating business performance and focus more on evaluating the strength of a consulting firm’s IP LBO modelling / IRR used by financial buyers, DCF / NPV analysis used by strategic buyers Private Equity target businesses that have strong management, robust long term drivers for growth and barriers to entry that are maintained by proprietary expertise, retained and leveraged through scalable Intellectual Property Note: Data reflects average responses. The responses relate to questions on the minimum acceptable KPIs required and the target valuation metrics for an investment. Strategic buyers Private equity Annual revenue growth rate (%) 11% 14% Gross margin (%) 44% 52% Revenue per employee ($k) 269 370 Utilization (%) 66% 71%
- 10. Strictly Private and Confidential© Equiteq 2016 equiteq.com Approach to valuing your business 10 Although private equity cannot extract the synergies available to strategics, they often have a more rapid value creation plan than most strategic buyers, which can enable them to be competitive on pricing for the deals they really want to do. The value you can achieve for your consulting firm is dependent upon properly positioning the value of your business within the lens of a prospective buyer. Average targeted current year Enterprise Value / EBITDA multiples by buyer group
- 11. Strictly Private and Confidential© Equiteq 2016 equiteq.com Approach to deal structuring 11 If you are looking for a definitive exit from your business within a shorter time period then a strategic buyer will enable you to exit the business faster, with a pay-out upfront and an earn-out over 2 – 3 years Strategic Investors Private Equity Majority buyout Smaller and midsized deals funded from earnings Loss of control Deal structured with a combination of cash upfront, fixed deferred payments and an earn-out Flexible funding options – minority and majority recap Financial gearing Management retains equity Entrepreneurial management team has a “second bite of the cherry” to gain more upside
- 12. Strictly Private and Confidential© Equiteq 2016 equiteq.com Approach to due diligence 12 Private Equity can act more swiftly and flexibly through a sale process as compared to a strategic buyer with limited M&A experience. Strategic buyers will want to see that your capabilities are unique and enabled synergies with their own. Strategic Investors Private Equity Pre-existing knowledge of target company’s industry Focus of due diligence will be on validating potential synergies and cultural fit Regulatory issues e.g. audit restrictions for accounting buyers Anti-trust considerations for larger deals Need for gathering intelligence on the industry if no prior or existing platform investments in the space Focus of due diligence will be on raising finance, assessing external growth opportunities, cash flows, management and potential exit routes Expect rigorous financial analysis
- 13. Strictly Private and Confidential© Equiteq 2016 equiteq.com Post-deal considerations 13 Private equity will have significant influence on your strategic decisions and direction of growth. Strategic buyers will have an earn-out period, for which the first hundred days after an acquisition are critical Strategic Investors Private Equity Business operations are eventually integrated into the buyer to enable synergies Periodic reviews of earn-outs Business is considered on a long-term basis Business independently operated and brand retained Management subject to periodic financial and performance review - cashflow management crucial Bolt-on opportunities to be considered Exit after investment hold period of c.3 to 5 years
- 14. Strictly Private and Confidential© Equiteq 2016 equiteq.com 14 Case studies
- 15. Strictly Private and Confidential© Equiteq 2016 equiteq.com More resources 15 A free source of information, advice and insight to help you prepare and sell your consulting firm Join at equiteq.com/equiteq-edge Or to speak to us, call +44 (0)203 651 0600
Editor's Notes
- #7: One note of caution is that all buyers cannot be neatly categorized. Sometimes “strategics” are just looking to boost their earnings and end up acting like financials. Other times, “financials” already own a company in your space and are looking to make strategic add-ons, so they’ll evaluate your business more like a strategic. By understanding the motivations of the buyer, you can understand how they’re determining your business value.
- #16: Refer to Core project and buyers research – due out next month