Is now a good time to sell your consulting firm? T H E 2 0 1 4 B U Y E R S R E S E A R C H R E P O R T F R O M E Q U I T E Q
Opportunities for sellers in the consulting sector M&A market Contents Highlights...3 Introduction...4 Buyers Research Report...6 Insight 1: Buyers expectations over the next three years...6 There s a lot of general advice in the market about the best time to sell a company and how much you can expect to get for it. However, there is sparse advice on selling consulting firms and very little input from the people who matter most the potential buyers of your business. That s why we undertook the first survey of buyers of consulting firms. We wanted to find out from them exactly what they re looking for over the next two to three years, whether they re looking to buy more or less, and what types of deal structures and earn-outs are being used. I think you ll find the results both thought provoking and insightful. We re pleased to report that buyers of consulting firms are predicting a 6% growth in deals over the next two to three years. The last time we saw growth of that magnitude was in 2006. We see a market that is very clear about what it wants to buy, where buyers expect to source deals from, and the top three factors that attract and deter them when considering a firm for acquisition. From a seller s perspective, they provide some key statistics on the failure and success rates at each stage of the acquisition process. We hope you will find our 2014 Buyers Research Report as interesting and informative as we do. Whether you re planning to sell your business or have already embarked on that path, this research will influence your thinking and provide some important signposts as to how best to maximize the value of your consulting firm. Insight 2: Buyers ideal characteristics for consulting firms...8 Insight 3: Where buyers source deals...12 Insight 4: Typical deal structures and earn-out periods...14 Insight 5: Deal opportunity failure rates...18 How to improve the certainty of a successful sale...23 Conclusion...24 Paul Collins Managing Partner 2 W W W. E Q U I T E Q. C O M / G R O W I N G & R E A L I Z I N G E Q U I T Y VA L U E I N C O N S U LT I N G F I R M S
Highlights Insight 1: Buyers expectations over the next three years Insight 4: Typical deal structures and earn-out periods Our research shows that buyer demand for consulting firms is positive going forward. Buyers anticipate a 6% plus growth in deals over the next two to three years. The last time we saw market growth of this magnitude was in 2006. So how do you capitalize on the best opportunities? Insight 2: Buyers ideal characteristics for consulting firms What profile of consulting firm are buyers looking for? Although there is a wide range of buyer requirements, the most popular criteria for buyers was found to be consulting firms with revenues between $15m 1 and $40m, stable financials, deep domain expertise and leveragable Intellectual Property. However, buyers often compromise on size, as the supply of quality consulting firms in the market in this range does not meet buyer demand. How does your firm fit with this profile and how do you stand out from the crowd? More than nine out of ten deals involve earn-outs or deferred payments. Nearly half of those payments are paid up-front. The good news for sellers is that around threequarters of earn-outs hit their targets. What earn-out metrics should you expect for your business? Insight 5: Deal opportunity failure rates It is important to appreciate the probabilities of success with each buyer and therefore to cast a wide net when going to market. Buyers said that on average 82% of potential deals do not progress to a signed Non-Disclosure Agreement and only 9% of the remainder get as far as a Letter of Intent. Given the high volume of potential opportunities seen by buyers, how can you avoid the pitfalls? Insight 3: Where buyers source deals Prolific buyers 2 get 42% of their acquisition opportunities via third parties, with 38% sourced through their own internal M&A team. However, even buyers with M&A operations put the intermediary route slightly ahead as the most effective source of deals. How can you enhance your visibility to the relevant parties in a sale process? 1 Currency used throughout is US Dollars. 2 In this report, we consider Prolific buyers to be those who acquire more than one consulting firm per year as opposed to Regular Buyers who acquire one consulting firm per year on average. NB Rounding of figures may mean that some totals round to just above or below 100%. This does not influence the findings. How to improve the certainty of a successful sale Although a small proportion of qualified acquisition opportunities result in Letters of Intent (LoIs) from a buyer, many of these opportunities do not appropriately articulate their value to the buyer. By following some important steps in an M&A process as outlined in our report, sellers of consulting firms can mitigate the inherent risks and increase the certainty of a sale to a very high probability. With the right approach and advice, there is no reason why your firm couldn t be one of the 200 consulting firms sold per month across the globe. 3
Buyers Research Report Introduction Given the growing volume of consulting firm M&A deals we have seen over several years in our annually published Global Consulting M&A Report, we felt it important to have a primary view from the buyer community. We commissioned research on the overall future demand, the types of consulting firms in demand, deal sourcing preferences, deal structures, and areas where deal opportunities most often fail. With this focus, we commissioned a primary piece of research to collect statistics from a diverse community of consulting firm buyers to reflect the realities of their M&A activity to date and their sentiment on acquisitions going forward. We are now delighted to present the findings of Equiteq s 2014 Buyers Research Report. In this report, you will find the views from 100 buyers of consulting firms from across the world, representing a broad range of consulting sectors and a view from the top from senior decision makers. Level of buyer contacts surveyed Business type of buyers surveyed 70% 26% 23% 2% 7% 6 Board / Partner Level Reporting into Board Other (Global) Head Office European / UK subsidiary US subsidiary Asia Pacific subsidiary Not specified 4 W W W. E Q U I T E Q. C O M / G R O W I N G & R E A L I Z I N G E Q U I T Y VA L U E I N C O N S U LT I N G F I R M S
Buyers Research Report Geographic profile of buyers surveyed Industry sectors of buyers surveyed North America 43 Europe 37 Global 23 Asia Pacific 12 4 South America 0% 50% 3% 11% 9% 21% 19% 11% 5% 9% Accounting & Mgt Consulting An independent research company conducted 100 telephone interviews and eight in-depth face-to-face interviews with directors and senior managers responsible for acquisitions of consulting firms 3. Buyers interviewed by telephone acquired 310 consulting firms between them in the last two to three years. In the next two to three years, those buyers say they intend to buy a further 330 consulting firms. As such, this report represents the realities of consulting firm buyers and their sentiment going forward. We are confident that you will find this report insightful, whether you are a consulting firm owner who is looking to go to market soon or are growing your business for sale in the next two to three years. Engineering & Mgt Consulting Marketing Environmental Consulting Combined Services IT Consulting Management Consulting Outsourcing Research Software Others 3 Eight qualitative interviews and 100 structured quantitative interviews were carried out by Illuma Research amongst senior decision-makers in Europe, North America and Asia Pacific during June & July 2014. We anticipate extending our 2015 Buyers Research Report to include senior decision makers in Asia. 5
For further information Join Equiteq Edge, our free source of information, advice and insight to help you grow and sell your consulting firm. Equiteq Edge gives you access to the findings of unique research conducted amongst buyers of consulting firms from around the world, insight from those who have sold their consulting firms and expert advice. Join Equiteq Edge at equiteq.com/equiteq-edge About Equiteq Equiteq is the leading M&A advisor for consulting firms. Equiteq helps consulting firms to grow profits, revenues, and equity value as well as achieve a successful sale that delivers maximum value for firm owners. 25
Contact us If you would like more information on our Buyers Research Report, our company or the various services we can offer please don t hesitate to get in touch. Email: info@equiteq.com Website: equiteq.com Equiteq has global reach through its offices in London, New York and Singapore. equiteqedge.com @consultingmanda 2014 EQUITEQ LTD. SEPTEMBER 2014