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.

1. Could the product be sold separately and used by a third party without the consultancy services?
2. Is the product fully documented?
3. Is the source code owned fully by you?
4. Can you estimate the market size for the sale of the standalone product and what data would underpin this estimate?

In 9 out of 10 situations like this, it makes more sense to bundle the product in with the consultancy sale. Usually the net margins of the consulting firm are significantly enhanced by using such a product and this is then reflected in the price of the firm.

When I ran WCI Group I accidentally grew the firm to £4m in 11 years! Then I climbed aboard what we now call The Equity Growth Wheel and it took only another 7 years to grow to £63m. As the leader of a consulting business there are eight levers you can pull to increase the speed of the wheel and the equity growth of your firm. If you build your strategic business plan around them, then you can ratchet up the value of the firm and your pension fund. Ignore them and you may have to live off your annual income for a long time! So let me tell you all about the wheel and its eight levers of equity value.

There are two uses for The Equity Growth Wheel; we use it as part of our Valuation and Market Risk Assessment process to calculate the valuation of a firm, but it should also be used as a strategic planning tool for equity growth at any stage leading up to sale. If you understand how the model works in a valuation assessment, then you can build a plan to increase value over time. In other words, set your exit goals now and use The Equity Growth Wheel to achieve them.

Many of you will have heard me say this before, but in simple terms your firm is worth a multiple of the last 12 months profit and when someone invests in your firm they’re gambling that profits will continue, or indeed grow over time. Therefore if the market risk assessment is high, then the profit multiple will go down, if it’s low it will go up. The eight levers in The Equity Growth Wheel are used to assess the risk, so if you get them right you’ll drive up your multiple, get them wrong and it will go down.

Each lever is an area of opportunity to either increase or decrease the probability of your firm delivering predictable and robust profit growth. By assessing your performance in each lever and giving it a weighted score (some levers are more important to buyers than others), an overall risk factor can be developed. This is then applied to the current multiple for the prevailing market conditions to determine an equity value for your firm. Also, by benchmarking your performance in each, you can create an improvement plan to increase growth and therefore increase equity value relative to profits over time.

So what would a buyer be looking for in a quality firm and what should you be striving for in each lever to grow your equity value?

1. Sales and Profit Growth

Can you show a consistent growth in revenue and profits?

This is the primary driver of equity value and a firm with a track record of erratic revenues and profits sends a concerning message to buyers and investors, so if you can show sustained revenue and profit growth AND high margins, you have an attractive proposition. Before you take you firm to market, you want to be able to demonstrate consistent growth over the last 3 years. Sales and profit growth is a reflection, or an output of your performance in the other 7 levers and the most important factor by far is your Sales and Marketing Process.

2. Sales and Marketing Process

Can you predict top-line sales revenue with accuracy?

If you can then there’s a high probability that you can forecast profits, which is why a quality sales and marketing machine is vital in the valuation equation, because it delivers a healthy business pipeline and de-risks the traditional feast and famine issues often found in consulting firms. If you leave all your sales and marketing activity to a small number of rainmakers, or serendipitous sales opportunities, then you’re hostage to a group of very mobile assets and your sales pipeline will be vulnerable and unpredictable.

Investors want lead generation to be independent of any individual, with automation embedded into the sales and marketing process. A marketing-led firm, where prospects are attracted through a balance of ‘pull marketing’ and ‘push sales’ is more likely to deliver a robust sales pipeline. Overall they want a culture where sales and marketing is seen as an investment and not a cost, and by ‘cranking the marketing handle faster’ you can drive more sales and cash into the business.

3. Market Positioning

Does your value proposition provoke a ‘WOW’ or a ‘so what’?

The more unique, compelling and targeted your value proposition, the better you can demonstrate that your firm can command market attention with greater ease than its competitors and the higher you can push up your fees. If you’re in the ‘me too’ zone, then the risk of future profits is higher because competition risks are higher and you have to fight harder for business. Quality firms with a strong ‘unique value proposition’ tend to have robust processes around such things as market research, competitor analysis and win/loss reviews. Notwithstanding your magnetism to the market, a clear value proposition helps you stand out in the crowd when a buyer is hunting for a firm like yours!

4. Management Quality

Does you leadership team work ‘on’ or ‘in’ the business?

An investor wants to see a balanced, experienced leadership team with a track record of delivering results, working in an environment where they spend more time working ‘on the business’ rather than in it! If this is happening then the firm is likely to be innovative, focused, and tightly managed with good KPI measurement and financial control. If the management style in the firm is right then not only will your buyer see effective processes, but they will also see people willing to go the extra mile when they interview key personnel in the delivery team.

5. Client Relationships

Do you have a well managed contact base and low client attrition?

The quality of client relationship management extends from your account planning methods to the way you nurture influencers, decision makers, dormant clients and old contacts. Good firms employ methodologies like Miller Heiman’s Large Account Management Process (LAMP) to protect and grow strategic accounts; they use a CRM or contact management system to assist in relationship development with individual contacts. Quality processes such as these enhance your ability to acquire, retain and build your client base, increase your revenue per client and improve the quality of your fee income.

6. Quality of Fee Income

Do you have long term contracts and no bad debt?

If a good percentage of your future fee income is locked in through long term contracts (12 months or more) with a number of clients, then you’re in the right place. Investors like to see a diverse client portfolio (not too many eggs in one basket) with fee income growth balanced across existing clients and new business. Add to that a quality approach to billing and debt collection, resulting in zero bad debt and low to zero working capital requirement, then you have a very strong card to play with investors!

7. Intellectual Property

How much IP is in your very mobile people and laptops?

A systematic approach to innovation, knowledge management and IP building will make your firm more valuable because it de-risks the acquisition from the buyer’s perspective. Their vulnerability to losing people post-acquisition is less a threat and it makes the firm more scaleable if IP can be ported to other resources. Also, effective IP development and management improves your market position by raising the height of the bar for competitors.

8. Consultant Loyalty

Can you stop your equity from walking out the door?

There’s no point in winning all those new deals if you can’t provide the skills and manpower to deliver, so you need an environment people want to work in, where they get recognition, reward, personal development and have fun. If you create this environment, then you’ll be more likely to hire the best people to keep your business growing and reduce their desire to take the next head-hunter call! Also, if you’ve locked your key staff into the future of your firm through profit-sharing and share options, then you’ll have a team where all are focused on the equity growth of your firm and its future acquisition. This is probably one of the harder issues for an owner to grapple with…the thought of giving up equity in return for a bigger pie at the end of the line!

So in summary…

Wherever you are on the growth journey, use The Equity Growth Wheel to increase value over time. Even if you’re at the ‘preparation for sale’ stage, use it as a tool to polish up your act. If you have a firm with a solid track record of profit growth over the last 3 years; that has a lead generating ‘machine’ independent of any individual; has a proposition that WOWs your market; has a management structure with breadth and depth, has effective client relationship management; can demonstrate long term relationships with blue-chip clients, that has mined and built its IP; and has its staff locked-in to the future of the firm; then you’ve probably used The Equity Growth Wheel without realising it!

This is a quick and simple tool to get a gut feel for how you think you're performing against the 8 levers of equity value - the output is a radar chart like this below...

We get involved in valuations of consulting companies for several reasons. Often the stimulus for a company sale starts with an understanding of the value of your firm in the current market. As market conditions change from year to year, timing of a disposal can make a dramatic difference to the price achieved for any firm. Some firms however are just interested in the current value in order to create the benchmark for value improvement over the coming years. Equiteq not only works on sale and acquisition transactions. We help firms grow equity value over the long term ensuring that they achieve their target value for disposal as fast and as painlessly as possible. Our valuation methodology not only calculates a current value but it also makes the link between cause and effect on company value. As you will see this goes well beyond just an understanding of the financials.

Calculating your equity value as an EBIT multiple

Our valuation method is a 4-step process that starts by assuming that your firm is the average firm in our sector that was sold in average market conditions over the past 5 years to the average buyer. Of course your company isn’t the average firm, so we then adjust that value up or down depending upon your financial profile, your investment risk profile, current average market conditions and our view of the buyers’ appetite for your firm if it was on the market today.

Our consulting industry M&A database rovides us with a lot of the base data used in the valuation process. The data is 50% historical information on previous M&A deals in the industry and 50% company information, inclucing financials, sector and service expertise profile of all firms in the UK and other places across the world.

These 4 steps are as follows:

1. Financial Analysis

We look in detail at your historical and projected financials. We make adjustments for any one-off expenses that could be argued as not part of normal trading costs. We also adjust for abnormally high or low compensation levels. We calculate the year on year growth in this ‘adjusted’ EBIT and assess your ability to generate free cash flow from profits in a sustainable way. We then apply a multiple to this adjusted EBIT to generate an investment return commensurate with the risk profile for the average consulting firm.

2. Equity Risk Assessment

We use our ‘8 levers of Equity Value' model to determine if there are any risk factors associated with your firm that would make it a worse or better than average investment opportunity as compared with the average for the industry. For example, under the section ‘Quality of fee income’; if you could demonstrate long-term contracts with clients then you would have a lower risk profile than most consulting firms; alternatively if more than 25% of your fee income was with one client and with no long-term contract then we would judge you to be higher risk than average. This would affect your score in this segment of our equity value wheel and may increase or decrease the multiple applied to your EBIT in calculating value. The 8 segments of the wheel are based on extensive experience and research into those factors that buyers assess when looking to value a consulting firm. We review them regularly to make sure they represent the current reality of buyer sentiment re acquisitions. This latter point is important because buyer sentiment does change over time. For example, even 5 years ago, it would have been difficult to get a good price for a consulting firm where 50% or more of its consultants were freelancers or ‘associates’. Today this resource profile is seen by many buyers as attractive because it infers an ability to reduce costs fast – and thus protect earnings - if the market takes a downturn.

3. Market Premium

The EBIT multiple used in step 1 assumes average market conditions. We hold data on multiples in our sector going back to the year 2000. We have also correlated this data with general market data going back 75 years. At any point in time we are able to calculate a discount or a premium to the market average. Currently we are experiencing a premium of 40% and it is fair to say that it is a seller’s market for consulting firm owners in the UK at present.

4. Buyer Synergy Premium

So far all of our calculations are independent of the type or specific buyer. However the price premium associated with finding the right synergistic buyer can swamp any premium associated with your growth, profit levels or even market premium. We have seen synergy premiums of 400% and so it really does pay to research the right buyer for your firm. Buyer synergy means that you have persuaded the buyer that your firm can grow their firm faster than it could grow without you. In these circumstances the investment return calculation becomes more than just based on your financial forecast. You are selling the story that together ‘2+2=5’ so that the buyer can justify paying a higher multiple of your profits to get this joint growth. It is in this area that Equiteq excels at both the valuation stage and of course when we manage the sale transaction due to the comprehensive nature of our database described above. At the valuation stage we are able to assess the likely population of buyers for the combination of your client/market sector experience and your service line skills. We calculate a ‘buyer synergy premium’ based on this data which indicates the relative attractiveness of your firm to the potential universe of buyers.

The resultant valuation from the above 4-step process gets as close as you can get to a target price based on actual deals done in our sector, comprehensive sector market data and the experience of hundreds of buyers of consulting firms.