The most common reason for one consulting firm to acquire another is to strategically enhance their business e.g. to help reach a new market place or geographic area. However, the growing number of private investors and private equity firms active in the consulting market mean that people are now also acquiring purely for financial and investment reasons. If you go to our most recent report on merger and acquisition activity in the consulting sector we have some statistics on this.

See below to find out what’s motivating consulting company acquisitions and how the private equity firms are making their money…

Reasons to acquire for ‘strategic fit’

1. Company Scale. Your firm struggles to win lucrative contracts with key clients because your scale does not compare with larger competitors and you pose a greater risk. You need to acquire to achieve the scale necessary to attract the kind of clients that sign the bigger deals.
   
   
2. Shareholder Pressure. You may be a plc with pressure from investors to grow shareholder value, but your organic growth options cannot deliver. Acquiring a private firm on a profit multiple less than your own traded multiple will achieve growth faster and add instant value for your shareholders.
   
   
3. Global Extension. Your target clients are increasingly global and you don’t have the international profile necessary to compete. Acquiring a company to build a global presence, or achieve a local culture fit, will expand your firm’s capabilities to attract and service clients in your chosen markets.
   
   
4. Sector Extension. You have a strong track record in one industry sector, your service is transferable into other sectors, but you know that cost of entry is going to be high. Acquiring a similar firm with an existing track record and a client list in other sectors will accelerate your entry into new industries. .
   
   
5. Service Extension. You have excellent skills in your domain, but there is a demand for services adjacent to yours and you don’t have the skills to service it. By acquiring another consulting firm with the competencies you require, you are able to increase your footprint in the combined client list and develop new business elsewhere. .

Financial motivators for private equity firms and investors

1. Pure Investment Potential. You are a wealthy investor who needs to achieve a better return on capital and you’re looking for a cash generative business with healthy profits. Service businesses like consulting firms, if well run, have a reputation for delivering high margins and good cash flow. This presents an opportunity to spread the risk and improve the return from your portfolio.
   
   
2. Leveraged buy-out. You are a private equity firm with an obligation to provide an outstanding investment return to your fund providers. A private consulting firm, with founders that are ready to retire and a good management team who are ready for the next stage of growth, presents a good investment opportunity. Buy out the owners for cash, but provide most of that cash through loans against the business. The founders are happy, the firm grows, pays off its debt and both the private equity firm and management team will benefit.
   
   
3. Distress Sale or Turn Around. You make your living by finding firms that are under performing but have the potential to do much better. You find a mature consulting company with a poor order book and a worn out management team, ready to sell at a significant discount to the potential market value of the firm. You acquire the firm, turn it around, and sell it on a year or two later for a significant capital gain.