Consulting firms sell "time", such as that of solicitors, accountants or architects, and can offer strong profit growth and cashflow, as well as representing saleable propositions with significant equity value. Contrary to common belief, M&A activity within the sector is strong, with around three-quarters of deals made valued under £30 million.
Evidence of the demand for smaller consulting firms exists in the fact that the current most popular size of agreements is around the £4 million mark, with the most recent high-profile deal remaining the £76m acquisition of RSM Bentley Jennison by Tenon.
Valuing a small or medium-sized consulting firm
Pre-tax profit multiples for consulting firm sales are completely dependent on the circumstances of a business sale, i.e. the market conditions and the profit potential of a given firm.
When selling a consulting business, bear in mind the following:
• A greater business sale price is more likely if buyers can see evidence of profits being made at the time of the sale. Projection of future sales and profits boosts the chances of achieving the highest multiples. Pre-sale efforts should be concentrated on establishing a strong sales and marketing process indicating a strong pipeline of business and removing the usual risks that come with operating a consulting firm.
• To create equity value in a consulting business, you should be able to show consistent growth in both profits and your revenues. Erratic accounts are a warning sign to buyers, so don’t consider selling until stable results have been established.
• If buyers can see a strong sales and marketing operation in place, they know they can simply pull the "marketing lever" harder to boost sales and profits down the line.
• Firms with a unique selling point (USP) are more attractive to buyers by virtue of being less at risk from competitors and more able to command the market. Such companies are also in a position to charge higher fees and find business easier. Firms without a USP ought to invest in areas like competitor analysis, market research and win/loss reviews to find an expertise gap in the market.
• A feeling of involvement and team effort on the part of your company leaders will let potential buyers see you have a balanced and experienced team who are dependable and loyal – working "on" the business rather than "for" it.
• Buyers will also want to see signs of good relationships with everyone from market influencers and dormant clients to decision makers and older contacts.
Businesses with low debtors on the books will be more appealing than those with less credit-worthy clients. This is a more salient point than ever as the percentage chance of recovering debts has reduced rapidly in today’s market.
Preparing for a consulting business sale
To ensure a potential buyer’s due diligence does not uncover any surprises, external advisers should be employed to help with preparing a consulting business for sale.
With regard to operations, outstanding negative issues should be addressed. Changes likely to boost future profits should be introduced, for example streamlining teams, dealing with nuisance employees and shareholders, making sure contracts are up to date and dealing with any litigation matters.
Regarding finance, any questionable expenses or assets should be tackled to insure against potential buyers finding anything dubious in your accounts.
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