We are about to publish our 4th annual Consulting Mergers and Acquisitions report looking back at how the market performed over the last year and it will come as no surprise to you to discover that the numbers with respect to deal values and volumes reflect a low point in the current economic cycle. However as we stand here in April 2010 you are probably more intrigued by what we think will happen to the market moving on as you plan and execute your exit or growth strategy, organically or inorganically.

If you want our analysis read on, or if you just want the conclusions go to the bottom!

Each year, along with our retrospective market analysis, we have attempted to predict the future and if we say so ourselves, been pretty close! For example, in 2009 we predicted that valuations in the form of revenue multiples (the best indicator of market sentiment from available data) would reach a low point of 0.9 and we were proven right when that happened in the 4rd quarter. The last time we saw valuations as low as that was in 2004. Compare that to the top of the last economic cycle in 2006 when 1.6 was eminently achievable for a quality firm!  So what is in store for 2010 and beyond?

We foresee two main market changes:

• A modest recovery in M&A volumes and values driven by big firm growth imperatives
• Deal structures with less up-front cash driven by the need for buyers to de-risk acquisitions

On the face of it herein lies a stand-off – we expect more demand but don’t expect prudent buyers to dip so deeply into their pockets, on the other hand why should sellers short-change the value of the investment they have built into their firms, or lock themselves into long earn-outs? However from what we have seen so far in 2010 there is we believe a win/win here. Before I describe where the forces for recovery are coming from and what a modern win/win consulting M&A deal will probably look like moving on, we need to understand the backdrop away from which the market is evolving.

2009 was a difficult year for the consulting industry

2009 was undoubtedly a very challenging and difficult year for the consulting industry.  After the collapse of Lehman Brothers in the autumn of 2008 many consulting businesses saw new orders dry up, particularly those companies exposed directly to the financial services, property, retail and other cyclical industries.  As they entered Q1 and Q2 of 2009 existing projects drew to an end and revenues began to fall. If we look at an index of revenue for the quoted US consulting businesses, these fell during the year by nearly 8% from their ‘pre-credit crunch’ levels. Similarly, an analysis completed by Equiteq on SME sized UK consulting businesses showed an average 10% fall in revenues.

Index of US Quoted Consulting Business Revenues (100= Q3 2008)
 

Clearly there is still uncertainty in the economic environment and some significant risks.  A number of European countries are in an extremely weak financial state, the levels of government debt are at worryingly high levels, thus creating the threat to reduced public sector spend on consulting. The banks are not readily lending and private equity remains subdued, removing one of the sources of cheap credit that supported the boom in the consulting M&A market we saw 3 to 4 years ago.

So the last 2 years has been tough for most Consulting firms. With client demand dropping by 10% shareholders and Partners in Consulting firms have seen share values and bonuses reduce. Not surprisingly they are keen to see this trend reverse! Indeed the ‘big four’ have publicly stated ambitious growth objectives. Attacking client markets and service lines with greater growth potential than others clearly makes sense. Acquisition is one strategy that could drive growth.

Forces for recovery in the consulting M&A market

We see three main drivers:

• Consulting industry consolidation
• Investment of cash flow
• Supply and demand

Consulting industry consolidation: There remain compelling reasons for a number of buyer groups to enter the consulting market and / or develop their existing practices.  Over the longer term, consulting offers substantial profit growth opportunities and unique opportunities for positioning other service lines. Examples

• Outsourcing groups – leverage offshore
• Facilities management groups – new service lines with higher Gross Margins
• Engineering groups – Global project opportunities
• Major accounting practices (eg. the “Big Four”) have made public statements that they seek to achieve substantial growth in their consulting practices, including through pro-active acquisitions (a change to their previous position). This has been substantiated by many recent deals.

Investment of Cash Flow: While banks might not be lending, they are also not providing returns on deposited cash.  Cash rich corporations in the business services market are therefore looking to invest with better financial returns, and choosing consulting businesses as a way to achieve a greater mix of high-margin business.

Supply and Demand: prices at recent levels have clearly attracted potential buyers in to the marketplace, where, often, they find that the best managed and unique consultancies in the most appealing spaces are under heavy demand. Examples include:-

• Environmental Consulting firms
• Regulatory Consulting firms – both financial and sustainability
• Operations Consulting firms – in particular cost reduction or profit improvement
  

Achieving a ‘win-win’ deal in 2010

The main question for buyers is how to acquire in the current uncertain environment without undue exposure to forecast risk. For sellers, the issue is all about price. With current price multiples at 60% of the peak of the last economic cycle, seller shareholders don’t wish to lock-in a price on the firm that doesn’t reflect it’s intrinsic value. Traditionally the use of earn-outs has been the main way that buyers have de-risked their purchase. Whilst earn-outs have been seen in a negative light by sellers, in today’s environment they represent the key to a ‘win-win’ deal.

The problem today is the size of the gap between the sellers view of the value of their firm and the price that buyers wish to pay. The buyer’s price today includes very pessimistic assumptions about growth. The seller remembers the ‘double digit’ profit multiples achieved in 2006/7 when firms were growing at record rates and is unsurprisingly reluctant to sell at a significant discount to these prices.

Even though a seller may have experienced a small decline in sales revenues in 2009, the sales pipeline could be looking more healthy today. In the past few months Equiteq has negotiated deals that de-risk the purchase for buyers yet provide double-digit EBIT multiples for sellers. A combination of some cash at close and an uncapped earn-out linked to the delivery of Gross Margin would appear to meet the apparent conflicting requirements of minimum purchase risk for buyers and maximum price potential for sellers.

In this environment, extending the period of the earn-out benefits both buyers and sellers, maximising the price delivered for seller shareholders and ensuring the acquisition delivers growth over the medium term. There are synergy and integration issues to be addressed with this approach and no doubt this won’t suit all buyers and sellers but it does represent a solution when the price gap appears to be insurmountable and that is likely to be a feature of many deal opportunities in 2010.
 
Conclusions
  
So what’s our forecast for 2010 and beyond?

Given the economic environment and trade levels in consulting, it is not surprising that 2009 saw very subdued M&A activity in the consulting market. On the other hand, while at the macroeconomic level the situation is weak, there are a number of forces that indicate a recovery of the market, not least because the ‘big four’ all want to put a year of shrinkage behind them and use their war chests to grow.

As a prospective buyer, 2010 should continue to be a good time to acquire with competitive multiples compared to long term averages and potentially some ‘first mover’ advantage by acquiring ahead of a wave of buyers who are waiting for greater certainty before entering the market.
 
Those sellers who have service offerings that are additive to the buyer in terms of product extension/expansion or sellers who can bring to buyers access to new clients/markets/geographies, coupled with strong management and good financial performance will complete deals at premium multiples. However, sellers should expect no more than 50% of a ‘good deal’ in upfront cash payment, and the remainder in a 2 to 3 year earn-out.

And finally what about multiples? With the forces described above, along with other indicators, we are forecasting that 2010 average revenue multiples will be in a range of 1.15 to 1.25. In fact from the 0.9 low point in 4Q 2009, in 2010 so far the average revenue multiple is 1.16.
 
So if you are intending to sell, or planning for that eventuality, now would be a good time to benchmark your firm and optimise it for maximum value within your exit horizon, and as you no doubt expect, we are here to help you on all counts if you wish!

It’s fair to say that 2009 was a year to forget from an M&A perspective. At Equiteq we spent most of the year helping consulting firms to survive the recession and M&A transactions were very thin on the ground. The chart below show the sorry state of the market last year as compared with 2007 and 2008 but even these numbers (131 deals closed in 2009 as compared with 197 in 2008) don’t tell the full story. Many of those deals in the first part of the year were those that started in 2008 and many were ‘distressed sales’ at prices that most sellers wouldn’t want to advertise!

2010 feels completely different. All the big 4 consulting firms have put aside large budgets to acquire this year. PWC started the rush last August by stating that they were going to triple their consulting fees. The rest have followed and it looks like 2010 is going to be a year of consolidation. This month KPMG announced similar plans to triple the size of their consulting practice. We completed our first deal this year in January with a sale to Deloitte and 3 more sales are due to close in the near-term horizon. Each week at the moment we are talking to buyers from all over the world who are looking to acquire in the UK. Exchange rate movements and publicly-quoted value multiples in the UK have made this part of the world an attractive place to acquire. Expect to see many firms change hands in the next 12 months and beyond into 2011.

Our expectation is that price multiples will follow the increase in demand shown by the interest from all of the big 4. At the peak of the last economic cycle in late 2006 firms were selling for a 40% premium on a 5 yr rolling average price. This premium dropped to a 10% discount at the start of 2009 – a much smaller discount than one might have expected given the press of recent times – and now prices are back to the average of the last 5 years. We expect premium prices to start to appear in the second half of 2010 and increase through 2011 and 2012. Whether they will ever reach the peak of the 40% premium achieved in 2006 is debatable but there is no doubt that later this year and 2011/12 will be good timing to sell your firm.

So if you have a growing consulting firm that has weathered the recession well ie you haven’t shrunk! and you have sales in excess of £5m with profits of greater than £1m, do give us a call. There are many buyers out there who will be interested in your firm!

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!

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!

In the early 1990's my old consulting firm, WCI Group nearly went into receivership (chapter 11 for our American readers). We faced closure because the services we were offering had been made unattractive because the economy had suddenly gone from boom to bust almost overnight. From 1986 through to 1990 we had prospered in good economic times. Our sales proposition was very evangelical! We were early proponents of the Japanese 'Just-in-Time' (JIT) manufacturing revolution that hit the automotive and electronics industry in the 80's. I used to spend many hours at public and private seminars/workshops banging the table about how western manufacturing had to change to compete with the east. In the boom times of the late 80's the message worked and we grew rapidly. When the 90's recession bit, no-one wanted evangelism anymore. Survival was the primary corporate instinct and 'cost-out' was what clients wanted to hear. Our JIT seminars went from 400 delegates to tens, producing losses and less prospects to follow-up. At the same time if we managed to get a sales meeting on a JIT training or pilot programme - our typical entry point for a new client - it just didn't go anywhere. Lots of talk but no commitment to work. This might sound familiar to you in today's similar economic environment!. We spent far too long trying to sell what the clients didn't want to buy. It wasn't obvious at the time that this was the problem but now, several recessions later, it is very clear. Literally days before the cash ran out we got one of those strokes of luck that saved the firm and taught me a huge lesson about making sure you are always selling what the client wants to buy. A colleague in another consulting firm who focussed on overhead cost reduction rang me to say that they had run out of capacity (!) and an existing client of theirs needed help. Could I help them?! 'Is the pope a catholic' was the thought that went through my mind! Of course we can help. The brief from my colleague was that the client needed cost out quickly so I built a proposal that did that and this was probably the first BPR proposal that my firm had done. In essence the proposition said to the client "if you give me £100,000, I will produce £250,000 cost savings within the next 3 months". I can remember the Chairman of this client paraphrasing the proposal back to me with these words and asking me if that is really what I meant. I said 'Yes' and his response was 'well, it sounds like a no-brainer to me. Go and do it'. That piece of work saved the firm and led to 5 years of continued growth off the back of a BPR methodology. It worked because it delivered what the client wanted at that point in the economy and it was clear what the ROI was for his investment in our services. I never forgot that lesson and today at Equiteq we spend much of our time re-inventing value propositions for consulting firms to make them attractive to potential clients. So the message is very clear. Today we are experiencing a global recession. Clients are again in survival mode and want cost out. Does your service offering make it very clear what financial benefits will accrue from your work? Can they see that what they will pay for your services will be paid back several times over and preferably this year? Are you prepared to give some form of guarantee on this and maybe even link your fees into the delivery of results. If the answer to some or all of these questions is NO then expect to have a hard time over the next couple of years. If the answer is YES then there is no reason why you should not grow and take market share from those who answered NO!  If you would like to read more on this subject then download our presentation on building Unique Value Propositions