When it comes down to it the value of your consulting firm is whatever any one particular buyer is willing to pay. We can take into account the market conditions, the robustness of your business in terms of past performance and future risk etc. but the deal you ultimately get will be dependent upon how hungry a buyer is to snap you up. We call this the 'synergy value' and it can double your price. This is usually a lot of cash!

Synergy value between buyer and seller is really important, so if your firm...

is in clients that a buyer absolutely wants to get into
has core skills that he desperately wants to have in his company
is in a market that’s growing like topsy

...then there's a good strategic fit and the chances are he'll pay a premium. So it makes a lot of sense to create a strong prospective shorlist of buyers who have the needs for which your firm can provide a solution.

This is a really interesting question this because I think every firm out there of any sort of size, say above a couple or three million in sales, has probably had an approach at some stage from somebody saying that ‘we’re really interested in your company and it looks like it might be a business we want to buy’. Those types of conversations are very good for the ego, you always want to have them because it makes you feel good that someone’s interested in buying you, but the worst way of selling your firm is to take those conversations seriously, because I was taught many moons ago in the M&A world is ‘one buyer, no buyer’!

Selling a consulting firm is a massive distraction from business as usual, so you want to be in the strongest possible possition to both maximise your value and ensure that if a deal is there to be done, it doesn't fall apart at the due diligence stage. To achieve that there are four key areas to focus on before you engage with buyers:

• What is your true value in the current market and to any one particular buyer showing interest in you?
• Research what other buyers there are out there that would rate your firm with a high synergy value to their own?
• What financial and operational risks and opportunities are there in the business that could either inflate or deflate your value?
• Is the timing right (from a personal and business perspective) and could you do better financially by continuing to build?

Taking the 'bird in the hand' is always tempting but prospective buyers rarely fly away in an instant, so you have nothing to lose by doing your research. To really find out if your firm’s attractive to buyers you should talk to people who have expertise in your sector because they will help you evaluate your position, remove the risks and bring more buyers to the table.

A well-managed consulting firm with consistent profits in excess of 20% pa could achieve a valuation close to 2 x sales revenues if market conditions are good. However if you achieve 10% margins or less, then it could make the difference of between 2 times and 1 times sales revenues or less to your valuation. If your financial performance is closer to 10% than 20%, then our free Gross Margin Modeller download could make a difference of Millions of £’s to your personal wealth!

Delivering average or ‘above average’ profits from your consulting firm is one of the main factors that drives up equity value. Many firm owners don’t realise that it is GROSS MARGIN that savvy trade buyers look closely at when assessing the worth of a consulting firm. As it is quite a common experience for us to look at a set of consulting accounts for the first time and see NO MENTION of Gross Margin, we felt it worthwhile to explain the real importance of focussing on this measure.

Our free Gross Margin Modeller is built in MS Excel, and it's there to help you understand the factors that drive this key performance indicator in the right direction. Read this article first then download the modeller and learn how to drive up your gross margins. Let’s define the measure.

Gross Margin (GM) or Gross Profit is what’s left out of sales revenue when you’ve subtracted all direct consulting delivery costs. These delivery costs don’t usually include business development time but do include under-utilised time costs (and re-billable expenses if your sales revenue line also includes billed expenses). For healthy firms the GM should be in excess of 50% in order to create sufficient profit to pay for marketing, sales, admin, finance, service development, etc, etc and of course to have something left to create value for shareholders! That’s you today of course and what’s left will fund working capital/investment and pay bonuses or dividends to key staff. In the future what’s left will be another factor that determines the value of your firm… but more about that another day!

So why is gross margin so important, particularly to trade buyers? Firstly let’s look at the obvious attraction.

If your trade buyer wants to buy your service and/or client competence, experience and contacts in order to integrate you into an existing similar business then they are probably not at all interested in your overhead structure. They may wish to leverage further their own overheads structure and so yours becomes surplus to requirements. In these circumstances it is your GM, not Net Profit that is attractive to them. Effectively your GM will flow straight down to a much-improved Net Profit for them, making their firm even more valuable than the price they have paid for you. This is a real win-win for both parties (except of course those staff in your overhead structure!) and is often the reason a trade sale is successful.

Now let’s look at what else a strong GM says about your firm, irrespective of the type of buyer. To do this we have to answer the question “what factors affect GM?” The most important factors are:

1.Your Sales Value Proposition. Are you selling services that are scarce, high value to the client and in ‘fashion’ or have your products been commoditised? For example, 10 years ago it was possible to command £2000+ a day for process re-engineering work. It was ‘in vogue’ and every corporate wanted skills in this area. Today you’d be lucky to get half that rate. On the assumption that the costs to deliver this service haven’t similarly reduced by 50% it is likely that if you are still providing the same service as 10 years ago then your GM has been cut substantially and/or demand is sporadic, also reducing GM through poor utilisation. Keeping your value proposition at the cutting edge is one of the best ways of maintaining a healthy GM. Some of that is linked to client value and inevitably some of it is about keeping pace with what is ‘in fashion’ in the market! Sales propositions should be reviewed quarterly and the average fee rate achieved from innovative propositions in the market as compared to the competition is one of the best ways of judging the value growth potential of a firm.

2.Size of Project. In my old firm, WCI Group, we were suffering at one stage with reducing margins. We introduced a number of measures to correct this and one of them which was very effective was to track and drive up the average size of project sold by the firm. Many commentators in the industry talk about the consulting ‘leverage’ structure ie the ratio of partners to consultants as the key to high margins and of course this is true. However, improved leverage is an effect, not a cause and just recruiting more junior staff without developing propositions that can use larger numbers of junior staff is a recipe for junior consultants sat ‘on the bench’ – this is unlikely to drive margins up! Aiming to sell larger projects forces you to think about the nature of your proposition and the size of consulting team it drives.

3.Consultant Utilisation. Whilst undoubtedly this is also an effect, getting this wrong can seriously damage your wealth! Lots of small projects make achieving high levels of utilisation very difficult so again the sales proposition and size of project are causes of poor utilisation. A ‘feast or famine’ sales pipeline that looks more like the Himalayas than the ski slope we’d all like to see is also a cause of poor utilisation. The wrong mix of full-time consultant employees and associate staff can also contribute to a bad result here. Are we making use of the many services that can provide short-term resources to smooth out peaks in demand and avoid too many costly troughs? Of course just sloppy management can badly effect your utilisation if it doesn’t get the focus it deserves. Make sure you don’t leak profits and value this way!

4.Long-term Contracts. Most of us don’t enjoy the luxury of having 50% or more of our workload booked for the year ahead. 3 months is more typical and I’ve seen a few weeks! Are there ways of structuring your proposals so that projects extend to many years? This doesn’t necessarily mean that you have to go down the Accenture and others’ outsourcing path to achieve this end. Finding client value that can be delivered continuously or periodically over many years can achieve the same objective. Contingent fee structures often provide the opportunity to deliver benefits and fees over the long-term rather than a short-term intensive engagement. Use of audits and benchmarking on a regular basis provide similar opportunities. Embedding monitoring software and tools in your client to measure and feedback on performance improvements often creates long-term contract opportunities. Apart from the beneficial effect on utilisation this can have, the ‘quality’ of your revenue profile will improve and this is a major factor in determining the ‘profit multiple’ that is used to value your firm by external investors. £1 of profit from a 3 year contract is worth more equity value than that same £1 of profit from a 3 month assignment!

So now we understand a little more about the importance of a healthy GM and some of the factors that influence GM, it’s time to have a go modelling your current business and running some hypothetical scenarios to see the effect that it has on your profit. Download the Gross Margin Modeller and enter the data that best reflects your current firm. You can input numbers of consultants, fee rates, utilisation %, consulting costs etc and all variable by level of consultant. The model works out the resultant GM that you should expect from this current structure. If you know your current reported GM, fine tune the data to reflect the actual result achieved today. You can then use the scenario sheets to model ‘what-if’s’. For example, “what if we managed to increase our value proposition to clients and achieve an extra average £200 per consultant-day in fees?”; “what if we were capable of selling projects that drove an extra 3 junior consultants in the team?”; “what if we managed to increase average utilisation by 10% due to a better mix of larger projects and using more associate consultants?”.

You get the point, I’m sure. Try many different scenarios and watch the effect on the GM. If currently your GM is below 50%, choose the scenarios that achieve a minimum of 50% and that have the greatest chance of being achieved. Then make them happen of course!

If your interest is increasing your bonus/dividend or achieving a higher equity valuation on your business, then increasing GM has a large impact on your Net Margin % as well as the absolute amount of cash that the firm generates. All of which is good news for the owners of Consulting firms!

This exercise is best done with your management team in a one-day workshop, away from the pressures of clients and staff. If you’d like some facilitation we can provide you with an ex-consulting Operations Director (who also developed the model!) to run the session and make sure there is an actionable plan at the end of the day.

Happy modelling!............

Download the Consulting Firm Gross Margin Modeller (be patient, it is a 1mb MS Excel file).

In the past few months I have seen far too many firms who are working very hard at full utilisation but struggling to build any real equity value. That's not to say that they're not growing. Often revenue growth looks good but profit margins are in single digits or even worse. A quick analysis of their financials almost always shows the same root cause. Gross Margin (GM) ie the difference between what you charge a client and what you pay consultants is way too low.

What do I mean by 'low Gross Margin'?

Well if your GM is less than 60% on a project and less than 50% at the company level, it is unlikely that you will be creating the funds for growth at the same time as delivering a net margin that will drive equity value. For a firm to have intrinsic equity value, not only does it need to produce a good net profit, year on year, but it needs to be able to grow that profit in absolute terms each year. So let's investigate why GM's are so low.

Fortunately we don't have to look too far for the symptoms even if the remedies are more complex!

Take a look at your 'blended fee rate'. This is the weighted average, taking into account the quantity of different skills at different rates, that you charge your clients.

For most firms in most sectors in today' market, if your blended rate is less than £750 then you are in the 'busy fool' trap! There are always exceptions to this rule of course depending on the type of work you are doing and the type of client. We all know that SME's and local government don't pay good rates. Moving to sectors that do might be an answer! But for most of us a good test of whether you are charging enough for your services is to go out to the contract or associate consultant market and find out how much per day you would need to pay to get the skill level required for your client.

If you are not charging twice as much, i.e. a GM of 50%, to the client for this work then you are probably selling yourself short.

"Why would a client pay twice as much for my firm to do the work as opposed to employing a contractor to do the same at half the price?", I hear you say! The answer to this question is a large part of the solution to how you build equity value in your firm and it all revolves the Unique Value Proposition that you present to prospective clients.  If you are selling individual technical skills then don't expect to make much of a margin on each consultant - employed or contract - that you provide to the client. If on the other hand; you help the client diagnose their problem, you craft a solution to that problem with them, you commit to solve that problem at a fixed price with a well thought through ROI and maybe even put some of your fees at risk to demonstrate your commitment and confidence, you programme and project manage the delivery of the solution and have case studies and testimonials to prove your worth. 

If you do some or all of this then 50% plus GM's are achievable

If you're already do some of this and are not charging for it, well maybe there is a problem with either your marketing or sales approach or it just could be that you haven't tried. Remember it's easy to sell a £10 note for £5! Getting full value for your services takes more effort and occasionally you will fail but that's good because you will know then just how much your services are valued. Of course it could be that you really just do sell bodies and that's fine so long as you realise that the path to equity wealth will be a tough one!

It’s an irrefutable law of business that a product with an ineffective value proposition is going to under-perform, no matter how good that product is. If you can create a winning unique value proposition (UVP) not only will prospects flock your way, but you’ll also find acquisitive firms on your doorstep willing to pay a premium for your company. Read on to find out how to build a strong UVP and what this means for equity value …

In a moment I’ll give you five reasons why you really do need to have a close look at your UVP from the equity value perspective. First, let’s clarify what we mean by a UVP and break it down into its component parts in a little model you can use for yourself.

What’s a UVP?

A UVP is a bit like a brand. At one end a brand is a company logo and visual identity, at the other end it’s the total embodiment of a company’s products, personality and the experience of its customers. Likewise, at one end a UVP is a simple marketing statement, at the other it’s a sales promise, fulfilled through the delivery of the service. In reality the UVP forms a part of the brand.

Here’s how to construct a UVP for your firm and individual products…

Unique

• Vertical industry sectors
• Horizontal job functions
• Services deployed
• Style or method of service delivery
• Quality of client experience

Value

Create a powerful perception of valuable outcomes and benefits, rather than features and costs, provide credible examples, and hit their emotional and logical interests.

•  Financial outcomes
• KPI improvements
• Company benefits
• Personal benefits
• Proof of the above

Present offers that starts the relationship which the prospect finds easy to digest, empathises with their burning need, and is hard to say “no” to.

• Situations attacked
• Needs addressed
• Low to no risk entry level offer
• High gain outcome
• Easy to make happen

The output of a UVP exercise should be worked into your sales and marketing process, but one thing is VERY IMPORTANT...there must be a high level UVP statement that’s succinct and easy to understand. Do this and it will have an impact, it will be easy for you to communicate and people will be able to refer business contacts in your direction because they can clearly pass on your message for you.

Now that we’ve clarified what a UVP is and how to build one, let’s talk about why they’re important to your firm…

Five reasons why you want the strongest UVP you can get:

Imagine this as a scenario; you’re a management consultant providing expertise in the field of Human Resources (HR). We know from our intelligent database of UK consulting firms that your part of a crowd of nearly 1000 companies with a reasonable turnover. From the point of view of your target audience, these are your competitors. The strength of your UVP will make a difference to your equity value in the following ways:

1. The market awareness of your company

By standing out in the crowd with a strong and unique message to market alignment, you have to work less hard than your competitors to grab attention. This means that competitors need to spend much more on marketing than you to get the same result.

2. The potency of your sales messages

Because of the emphasis on value, you are able to exploit your market awareness and pull more leads than your competitors who are more focused on product and service messages. Therefore you gain a stronger pipeline than your competitors.

3. Converting your prospects into clients

Faced with a decision between a value based proposition and more service based offer, your prospects are more likely to choose you because you’ve pressed the important buttons. So your cost per client acquired is lower than competitors.

4. Charging a premium price for your services

The more uniquely niche and targeted your proposition, along with claiming the value high ground, the more you can push your fees up because clients are less sensitive to cost. This means that your profits go up too.

5. Atractiveness for a buyer

With a strong UVP, you’re more likely to get on the radar of acquisitive firms looking to fill a niche in their growth strategy. Without a strong UVP, you may make the long list, but not the short list, even if you have the best fit, you could go unnoticed!

Going back to our example…imagine that Equiteq’s been commissioned by an acquirer to find them a firm like yours in HR consulting, with a turnover between £5m and £10m, serving the Financial Services industry, specialists in leadership development, with strong training products.

Unless you’re already known to us, or someone in our network, we have to start with our database of UK consulting companies and the profile of the target firm provided by the acquirer. Using our search technology, you would almost certainly make the first cut of 1000, you may make the long list of 328 firms because you’d get matched on the high level factors like company size and industry sector profile, but unless your website tells us that you fill the unique space required by our client, you could be left behind!

Whoever said "Profits are an opinion, cash is fact" certainly had his or her head screwed on the right way around! This is a sentiment echoed by most consulting firm owners I meet. However, unfortunately I don’t often see this belief translated into the working practices of cash-flow management in their companies. It’s a common problem in the consulting industry, but this is an important equity value issue if you want to sell your firm. When your potential acquirer or investor takes a good look at your financials, good cash-flow management sends a very positive signal, whereas the opposite rings alarm bells.

So why is it a common problem and what can you do about it? The answer is easier than you think!

The scenario for poor cash-flow

Typically the way it works in a consulting firm…You’re approaching month end in August with an upcoming invoicing run and you need to pay your consultants. You chase your team for their timesheets and expenses so that you can bill your clients, however the law of ‘herding cats’ applies and whilst the timesheets are not a problem, they struggle with their expenses (because it’s a hassle!), in fact most slip to September! So there’s a delay in getting the bills out and your clients won’t receive their invoices until September month end. Your best clients will pay by the end of October, but other debtors may extend out to 60 or 90 days. Meanwhile you’re paying your employees on time, but it’s at least 90 days before you’re recovering costs and getting the cash in for work done. This gives you a working capital headache!

The root cause of the extended delay in this scenario is that the expense collection process is linked to the invoicing run. However even if you have the slickest process in the consulting industry, and everyone puts their returns in on time, at best you’re collecting money somewhere around 45 days after delivery. That doesn’t sound fair to me!! Most purchases I make require payment before, or on delivery, so why can’t we do that in consulting?

How to achieve a working capital requirement of zero

The first step is to divorce the two processes of invoicing and expense administration. When you write a piece of new business with a client, you ask for fees plus 15% for expenses (25% for foreign) and agree to reconcile against actual expenses every 90 days. Most clients like this approach because it’s predictable. Not only that, if there’s one thing that causes most billing arguments with clients it’s the expense charge and this method reduces the risk of conflict to almost nothing.

Secondly, you bill them on day one. Let me say that again…you bill them on day ONE. At this point I can hear many of you shuffling in your seats! I can honestly say that if you have difficulty with putting this to a client, then the problem is in your head and nowhere else. In my experience 8 out of 10 clients don’t even raise an eyebrow. This should at last be your start point when you sign a deal, the worst that can happen is you get into a debate and lose, but 80% of the time you’ll not even have to discuss it if you keep your nerve!

Do it this way and the phasing looks like this:

Day 1 – Forward bill fees for next 30 days

Day 1 – Forward bill expenses for next 30 days at 15% (25% foreign)

Day 30 – Clients settle account

Day 30 – Pay consultants

Day 90 – Reconcile expenses with client

Net Result - Zero working capital and cash positive

If you can put this into practice, then when a potential investor takes a hard look at your firm, you’re going to give them a very warm and confident feeling about your business and it will increase your chances of a higher equity value. We’d like your opinion on this billing approach. Do you agree, disagree, or do you have any success stories that demonstrate how you do better than zero working capital? Please let us know, we'd like to share your views (unless you tell us it’s a trade secret!).

It’s quite a personal decision on which direction you take and it depends on how you view the purpose of your business in the way it rewards you.  If your firm has become a lifestyle business where you’re able to balance the needs of your personal life with those of income generation, you absolutely enjoy what you’re doing and can’t imagine doing anything else then it may make sense to carry on doing what you’re doing. However the only challenge that I'd make to you is are you putting enough away from your earnings each year to fund your retirement, so that when the day comes when you cant or don’t want to continue you’ve achieved financial security?  Consulting is really a young man or woman’s game, it’s exhausting and you’re not going to do it forever. At some stage you’ve got to get off the wheel and either hang up your boots and do nothing, or do something new.

There are also a lot of people who run a lifestyle consulting business because they’ve never considered the possibility of selling it; they think that a people business can’t have any value. Well that’s certainly what I was told in the early 1990s when a lot of my friends who went into other industries said “I don’t know why you’re messing about with this consulting business it will never have any value!” At first sight that sounds reasonable because all of the assets of the business have got legs! There are a lot of people who would view a consulting business with the sort of partnership mentality found in accountancy or law, where the name of the game is to extract as much cash from the business on an annual basis as possible and not worry about the end game. Of course if you’ve got very high earnings and you are disciplined enough to put money away each year you can do that and not worry. However there are two reasons why that may not be the most lucrative approach.

The first is that every time you extract money from a company, no matter how clever you are at getting it out you pay between 30% and 40% tax on it (in the UK) either as income tax or tax on dividends.  So the idea of extracting money each year and putting something away is fine, but it isn’t always the most tax efficient way of doing it.

The other reason is that you CAN ‘have your cake and eat’ it because there’s nothing to stop you extracting as much cash as you want each year and then if you’ve managed to be successful and build a business that’s got some equity value, you can realise that equity value at the end of a certain period of time. The ideal scenario is that you just keep enough cash in the business to be able to achieve your growth objectives. One of the great things about a consulting firm is that it doesn’t consume that much cash to grow, you’re not investing in capital equipment or buildings and things like that, you are in essence just managing the gap between when you get paid by clients and when you have to pay staff salaries. If you’re really clever that gap can be zero, so a consultancy business doesn’t consume much working capital. You may need to leave some in for additional sales and marketing, product development and things like that to fund your growth, but you shouldn’t have to leave too much in there. And then if you do the right things then you’re going to have a business that’s worth something.

It’s rather like saying to somebody…you can spend the next five years working with clients and doing great stuff and taking a good salary, or do exactly the same thing and build up a pension scheme at the end. So it’s a choice, you can build something of real value that you can sell onto somebody else or just walk away with nothing!