5. Realising value
Owners of consulting businesses, including entrepreneurs who have established their own firms, are rightly concerned with succession planning. This includes the professional pride of creating a legacy and safeguarding the jobs which may have been generated and the client work which is being done. But it also includes, critically, a strategy for business owners to de-equitise and extract some of the value that has been created over time through the investment of expertise and, very often, personal funds.
Options for exiting: from M&A to IPO
There are a range of options available, with the most appropriate choice often depending on the extent to which the business owner has a desire for continued involvement in the future of the firm that they have established or built up.
For some businesses who have reached maturity, or, more frequently, a business in a fast growing sector that has hit their glass ceiling in terms of scope and scale or achieved the objectives of the business leader’s strategy, a common next step is to seek to be acquired by a larger firm to take the business to the next level.
With many consultancies on the hunt for businesses which offer a route to depth of expertise in a niche or growing area – in particular digital – or in a new geographical jurisdiction, M&A should not be ignored as a way for entrepreneurs to successfully exit and realise value from their businesses. This can often provide access to new clients as well as complimentary service offerings.
"M&A is not the only option for entrepreneurs wanting to take some value off the table and prepare for the future."
Employee ownership can be a viable route to simultaneously incentivising teams through the establishment of individual business responsibility, and unlocking a degree of value for owners / entrepreneurs. Employee ownership has become established in the professional services industry, with architects like Make and law firms such as Stephens Scown successfully adopting the so-called ‘John Lewis model’, and it is expected that more consultancies – particularly those which are entrepreneur-led - will begin to explore it as an option in the future.
In some professional services sectors, notably law - with examples ranging from Gately to Gordon Dadds - IPOs have been executed or much discussed as an option but this has not as yet translated into significant wider listing activity in the consulting sector. The key dynamic to an IPO is a firm which is willing and able to hand over an element of control to a central management team, and which has fast growth ambitions to successfully utilise the capital raised. Of course, an important consideration when approaching an IPO is the cultural change for organisations when managing the shift towards reporting to shareholders; this can be heightened when the original structure is a partnership model.
Private Equity on the lookout
There is now an established interest in the consulting sector and broader professional services from private equity, as we have seen with Permira’s $1.75bn acquisition of Duff & Phelps and a host of other recent UK PE transactions.
This is being driven by a number of factors, not least the high margins and attractive cash generation profiles that are possible in the consulting industry and the prospect of synergies with other investments (in particular access to data), and investors are prepared to offer a range of options to expand into the market. This includes ‘Partnership Capital’ which potentially offers business owners a way to: de-equitise without selling completely, raise capital without incurring debt, and in some cases manage stakeholder situations. Some PE houses have raised funds specifically to service this market need.
Preparing for exit
One of the key challenges for owners looking to sell a business, or a portion of it, to investors is shifting the value position from being inherent in people and relationships to being intrinsic to the business itself.
In an industry which relies so much on human capital and intellectual property, a good deal of value is tied up in personal relationships and individual goodwill - and there is a risk of losing this should team members at any point decide to leave. The imperative for owners is to ensure that they have the infrastructure in place which makes their business a more viable and sustainable prospect.
For example, business buyers will want to know that talent - the value creators – will be part of the business going forwards and so having a robust people and HR strategy in place can be key. Share incentives, for instance, may be rolled out to teams in advance of a PE sale (or indeed an IPO) to strengthen the commitment of talent to the business, or earnouts agreed with leadership teams prior to sale.
Whatever the chosen exit strategy, in advance of any capital event early planning, in line with the other key drivers of change in the industry, is critical to maximising value and ensuring a smooth and efficient process.
Five considerations before a capital event
For owner-managed, entrepreneur-led organisations unlocking value from a business that has been successfully built is a key concern – particularly in an industry so reliant on people, goodwill and intellectual property where value is often dependent on individuals and personal relationships instead of intrinsic to a business itself. Early planning is critical, and remembering the following can significantly raise the viability and attractiveness of a venture to investors:
- Invest in branding to establish a tangible and market-friendly umbrella under which your human and intellectual capital sits.
- Mitigate any over-exposure to one particular client or location.
- Strengthen your people strategy, including incentive schemes, to secure long-term talent commitment. This may include considering appointment a Non-Executive Director(s) to assist with governance.
- Professionalise internal functions such as HR and Finance - despite the potential hit to EBITDA - and ensure accurate, secure record keeping and enhanced management reporting.
- Seek to define mid to long-term sources of potential value and roadmap the strategy to unlock it.