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.

Nothing is much more exciting than the prospect of selling your firm and gaining financial security from the business you’ve worked hard to build, but the M&A road is littered with casualties where the positive has turned negative because of bad foresight, planning and preparation. It doesn’t matter whether you’re aiming to sell your company in the next year or in future years, preparation is the key to success and by understanding the process now you will be better able to plan your timing, mitigate the risks and maximise the value of your firm. Read on for the nine steps in a quality process that will take you all the way from valuation to company disposal with minimum pain along the way.

Step 1 – Initial valuation and market risk

This crucial first step is about establishing a target valuation and unearthing any show stoppers or issues that might harm your sale. Your initial valuation will be based on four main factors and by understanding these you will place yourself in a strong negotiating position with your bidders down the line:

1. return on investment based on your current financial performance and growth prospects
   
2. buyer risk factors that may cause them to downgrade the value of your firm
   
3. a market premium based on current market activity (currently 30% to 40% in 2007)
4. a synergy factor based on your ability to positively impact the buyers’ business

We use our Valuation and Market Risk Assessment process to assess those risk factors that might cause problems or inhibit the maximum value. Once you have identified the issues, you can then put a plan in place to eliminate or mitigate the risks and maximize the value of your firm in the process.

Step 2 – Maintaining business as usual

While conducting the sale preparation, you must ensure that the business continues to grow on its current trajectory. This is a crucial issue and is one of the main causes that either delays a sale or reduces the price achieved. Your organization plan must ensure that there are sufficient resources to manage both the ongoing growth of the firm as well as the sale process. Of course one of the reasons to employ advisers at this stage is to reduce the management load of the sale process so that you can get on with ‘the day job’.

Step 3 - Building the buyer list

The buyer (or bidder) list is the group of target firms that on paper could be interested in acquiring your consulting company. You should be looking to build a list of 40 or more potential bidders and they are likely to come from two main sources. Your team will almost certainly have intelligence on potential buyers, but the majority will probably come from your M&A advisor. The list should be categorised into groups based on a view of their potential synergy with your firm. Synergy factors can dramatically affect the price achieved and so it is important that you develop a strong story about synergy, customized for each buyer group.

Step 4 – Preparation of sale documentation

While preparing the firm for sale your M&A advisor will be collecting the detailed, financial, operational and commercial information required to produce the sale documentation which comes in three forms:

The first of these usually called the ‘Blind Profile’. This is a short two page document that is used to generate initial interest in the firm with buyers. It includes financial, operational, service and client highlights without mentioning the name of your firm. It is a marketing document that must show the firm in the best light to differentiate your firm from others that may be for sale during the same time period. It should talk as much as possible about the potential synergy between your firm and the buyer. Several variants of this document will be required based on the different categories of buyers.

The second document is a rather longer Information Memorandum (IM). This 30-page document describes all the strategic, financial and operational information that is likely to be required by a buyer. It is meant to be a factual document and covers financial history and projections; service line descriptions; clients and markets; staff and compensation; assets and liabilities; firm strategy and reasons for the sale.

The third piece of documentation is a compelling management presentation that can be customised and used in initial meetings with bidders.

Step 5 - Lining up legal and tax planning experts

Issues that can take more time than you might expect relate to management organization structure and remuneration or share issues. By engaging lawyers and tax planning experts at this early stage you can make sure that legal issues relating to company incorporation, contracts, shares, liabilities and such like don’t delay the process later, or present nasty surprises! If you don’t have access to trusted legal or taxation experts, your M&A advisor will be able to recommend them to you.

Step 6 - Engaging the buyer list

Having worked on all those issues that might raise questions with buyers and possibly reduce the price achieved, and with all the background work completed, you can now begin the sale process and start contacting the buyer list. The blind profile is sent out, then followed up with telephone calls and emails to establish interest and pre-qualify bueyrs. Those that appear to be both able to buy and also express an interest are invited to sign a Non-disclosure Agreement (NDA) that prevents them from discussing the details of your firm with third parties. It also reduces the risk of them poaching any of your staff in the event they are not successful in buying your firm. Those that sign the NDA would receive a copy of the IM followed up with email and telephone calls to ensure that they are fully aware of the benefits of buying your firm.

Step 7 - Initial offers from interested buyers

Those that wish to progress further will wish to meet the Management team. This is your opportunity to impress bidders with the quality of both the firm and the Management, whilst also discussing those items of synergy that will increase the view of your value in the eyes of the bidder. There may be several meetings with each bidder before indicative offers are made. The offers will comprise of a total value and the proposed structure of payment. Of course the competitive nature of this bidding process will help to maximize the value of each offer.

There are many variables here and it is not unusual for bids to be accepted that don’t provide the maximum offer value but perhaps offer a higher value upfront with the remainder of the consideration in safer non-contingent financial instruments like bank-guaranteed loan notes. It’s important for you at this stage to understand the relative value of each offer as well as any contingent risks.

Step 8 - Heads of terms and due diligence

Once you feel you have received the maximum bids from each party the next stage is to decide which firm you would like to be the successful buyer and ask them for a ‘Heads of Terms’ document that describes the detail of the offer subject to successful due diligence (DD). You then enter a period of exclusivity where you are prevented from progressing a sale with any other third party. This typically provides the buyer with four weeks during which time they will perform their DD. This will include financial and legal DD but may also include commercial and HR. It is almost certain in a consulting business that they will wish to speak to one or more key clients and you will need to manage this part of the process carefully so as not to expose your relationship with the client.

Step 9 – Signing the sale and purchase agreement

DD ends with your lawyers drawing up a Sale and Purchase Agreement together with warranty and disclosure documents for signature. The legal process can be done in parallel with the DD if you are pretty certain that the DD isn’t likely to expose any problems and you don’t mind taking the risk on the legal fees if for some reason the sale doesn’t progress.

In summary

If you add up the elapsed time for all of the above activities then your firm could be sold within 6 to 9 months from the start of the process. It could be less if you find a buyer early on that is prepared to make an offer to ‘knock out’ other potential bidders. It could of course take much longer if you find some serious issues in Step 1. Then of course there are external factors that could cause a delay, like a market collapse, or a key client that stops doing business with you! Clearly, the longer the process runs on the higher the risk that something will come out of the woodwork for you or your buyer. That’s why with good planning and preparation you can limit the risks and run a smooth process that gets you from A to B, with a successful and lucrative completion in a controlled and speedy way.

The process of selling a consulting firm can be a fragile affair where all the initial goodwill and grace between you and the buyer can quickly turn into negotiating stand-offs and eleventh hour fall-outs. Months of meetings, due diligence, planning and drafting sessions can quickly evaporate due to nasty surprises, unclear expectations, or just plain bad luck. For every M&A deal announced there are many, many more that fail or never get past the courtship stage for a wide variety of reasons. Based on our experience over the last few years of watching buyers and sellers walk away from the table, or seeing sellers reluctantly settle for tougher terms than they deserve, here are ten of the most common deal breakers with some tips on how to tighten the nuts and stop the wheels from falling off on your journey to the bank!

1. Don’t take too long to complete the deal

The risk of the deal failing over time follows the Pareto Principle; there’s a 20% risk of failure at the thin end of the time curve and 80% at the thick end. The longer time goes on, the more opportunity there is for something nasty to be found by the buyer and a greater chance of you falling out of favour with lady luck. Any one of the remaining nine deal breakers below could rear its ugly head as time drags on and a vicious circle will develop. Consultants are meant to be good at project management and this is the way to mitigate the risk! Before you take your firm to market, make sure you have all the bases covered in the sale preparation and get the right resources ring-fenced so that all eyes are on the important balls.

2. Don’t enter the process with conflicting interests among the shareholders

If you have a complex share ownership structure you don’t want things getting messy when the buyer comes to the table. While you as the main shareholder may be highly motivated to sell, or settle for a certain deal structure, perhaps a junior director who hasn’t yet earned all his/her shares will be on a completely different page. If this comes out when the buyer interviews key staff things will get complex and it will be difficult to strike a deal. The only way to ensure this doesn’t happen is to resolve these issues with each and every shareholder in the process leading up to the decision to enter the sale process.

3. Don’t miss your financial forecast during due diligence

Missing your financial forecast during the sale process is very bad news, the buyer will worry about your financial management and may want to dig deeper and deeper into the cause, which in turn may uncover additional issues as they drill down layer by layer into your financials. There are some things out of your control, but it’s within your power to make sure that you’ve a robust financial management and forecasting process and to choose the time to take your firm to market when you’re confident in the stability of your numbers.

4. Don’t suffer sales famine while buyers are looking

This is crucial because the profit multiple the buyer is prepared to offer is significantly dependant on their confidence that your profits will continue into the future. Clearly, if your pipeline reduces unexpectedly during the sale process then a fuse is going to trip in the buyer’s mind to trigger a deeper examination of your sales and marketing process and a possible reduction in their bid. Depending on your sales cycle time, you need to put a concerted effort into sales and marketing in advance to make sure that the engine is tuned and everything stays on track during the sale process and beyond. Getting this right will also reduce the risk of missing future financial forecasts in earn-out circumstances or when your deal structure relies on future targets being met.

5. Don’t risk important people defections part way through

Losing a senior or key member of your staff during the process will do two things for the buyer; they will question the quality of your HR management and want to re-assess the value of their prospective acquisition. This issue is linked to item 2 above but mostly it comes back to the measures you’ve taken to lock-in key staff well in advance of sale. If you’ve introduced motivational reward and recognition programmes along with an equity share ownership scheme, then you’ve probably done the best you can to reduce this risk. Don’t forget that 70% of something is worth more to you than 100% of nothing!

6. Don’t get cold feet

Deals can fall apart simply because owners have reservations or anxieties with selling the firm and the professional and personal stress that comes along with that. Not being crystal clear about the motivation for the sale part way through the sale process is bound to cause personal strife among the shareholders and irritate buyers. You don’t want to change your mind half way through, so don’t enter the process half-cocked, have clear objectives in mind and for each individual, pin down who wants to stay and who wants to leave and in what period of time. Do this and everything will be on the table up front and there will be much less scope for prevarication and indecision.

7. Don’t leave room for nasty surprises in the finances

The last thing you want during the pressure of due diligence is for the buyer to discover an ignorance or lack of understanding about the financials in your business, or even uncover something nasty that you should have spotted and dealt with in advance. This could be a simple accounting mistake, or a hidden bombshell like a fraudulent entry. If you have a finance director with an eye for detail and with whom you would trust your life, you’re probably covered. If you’re not in this enviable position, then take measures to get your accounts professionally audited and don’t enter the sale process until you’ve tested and retested your complete command of the numbers that govern the shape of your costs, revenues and profits in the business.

8. Do find buyers with the right culture

Too many deals never get off the ground because of a culture mismatch between the seller and buyer. The buyer is going to walk away if they think integration is going to be difficult, and you’ll walk away if you’re worried about how your staff and clients will be able to work with the new entity. It’s there for more than one reason, but our rule ‘one buyer, no buyer’ applies here, the chances of cultural alignment are improved if you’re talking to a range of buyers that have been carefully researched and selected by your M&A partner because of their ‘best fit’ characteristics with your firm. This is particularly important as the deal progresses through the due diligence phase when it’s likely that your team will have to meet at close quarters with the buyer’s management team to work on integration details. If your teams don’t get on together the deal could be in jeopardy. By this late stage you will probably be in exclusive discussions and re-connecting with previous bidders, who you have already told came second, is extremely difficult. It probably means starting the whole process from scratch at a later time and dealing with de-motivated shareholders rueing missed opportunities!

9. Do walk in the buyer’s shoes

When all the pleasantries are over, it always comes down to price. We’ve never met a seller who didn't think their consulting firm was worth more to them than it was to the buyer! Many owners are just unaware of the realistic sale multiples in the consulting industry, have never had their firm properly appraised, and they start with a view of the value of the firm, without being able to sell that value to the buyer. If you’re going to drag the buyer over the bridge between their price and yours, you need to be able to justify it and not come across as plain greedy. The best way to do this is have a sound understanding of deal values in the current consulting M&A market and a detailed understanding of the synergy value of your firm to the specific buyer, something for which they will be willing to pay a premium. In short, it’s all about knowing the market, salesmanship, and seeking out a range of buyers with synergy who want to compete to buy your firm.

Finally and in conclusion…

10. Don’t let bad luck strike!

It’s difficult to mitigate bad luck! Something out of your control could change the game. With all the best planning in the world, something unforeseen and unimaginable inside or outside your firm could happen. The best you can do is to plan for the expected and unexpected just like you would with any other event in your organisation. However if there’s one thing on this scale that’s most likely to thwart your progress to sale it’s your client market collapsing for some reason during the deal process. If all your eggs are in one basket then the risk goes up, so diversity in your clients and markets is the ideal way to be as safe as you can be from external issues. Back to our first point, the longer the deal takes the more likely you expose yourself to bad luck, so aim to complete a deal as fast as possible.

You can of course make your luck by taking note of these deal breakers and manage the risk…..then keep your fingers crossed!