M&A in the consultancy sector: What do buyers really look for in an acquisition target?

The potential success of a sale process in the sector is dependent on a myriad of factors beyond the company’s headline financial performance.

Some of these factors you can favourably influence in advance of a process. Others are likely to be inherent to your company’s market position and business model.

Regardless, taking the time to pre-emptively build self-awareness on likely buyer perception of the strengths and weaknesses of your business proposition before actively exploring strategic options is an important step in any pre-sale planning.

M&A in the consultancy sector:  What do buyers really look for in an acquisition target?

Whilst no company in the world has a flawless proposition, an ability to balance the rightful positivity with a dose of realism and honesty about limitations, is valued by acquirers. No more so than in the consultancy sector where talent is often the most valuable resource on offer to any prospective buyer.  

What are these factors and how do buyers really perceive them? Below we consider the key drivers of buyer sentiment in the sector based on our experience.

A) Market positioning: Niche players represent the missing piece in a buyer’s strategic jigsaw

Niche specialists with narrow market credentials and deep capabilities tend to garner higher favour, providing their total addressable market isn’t seen as a future constraint to growth. Potential buyers in such situations see a more defensible market position, one that also is more additive and easily integrated into existing operations.

In contrast, companies that have diversified too far from their core offerings tend only to partially fit into a buyer’s proposition and will often require the buy in of more internal advocates across differing divisions. More specifically, outsourced labour aggregators generally deliver lower margins and have a less collaborative relationship with key client stakeholders, which holds less appeal to buyers who consider themselves to be value added strategic players.

From a sector focus perspective, deep vertical credentials in areas such as digital transformation, ESG, and financial services have been particularly sought after in recent years.

B) Client Base: Deep, enduring strategic relationships are invaluable

Buyers value engagements with senior-level client stakeholders - the more senior and closer to the overall strategic direction of the client and its consultancy project, the better. Direct access to blue-chip C-suite is however extremely rare for smaller independent players.

Blue-chip clients and a diverse client base are a potent recipe for boosting value. A degree of customer concentration is often inherent in growing owner-managed consultancies, but any over-dependency will be heavily scrutinised and risk value erosion or loss of appetite from the buyer.

C) Competitive market landscape: The perfect buyer is often closer than you think

Consider who you compete against in the market, as these often become the acquirers due to their pre-existing knowledge of you, and the market share you possess that they desire.

Similarly, anyone you have already actively collaborated on a commercial level with will already understand the value of your proposition and have a pre-emptive understanding of potential fit. We often find in such situations those companies are willing to move decisively and pay the highest price.

Commercial collaboration can however become a double edge sword. We typically urge caution when a potential dependency emerges as this can deter what would otherwise be strong buyers for the company later down the line.

When prospective buyers seek to formalise commercial collaboration with a minority acquisition or investment, the benefits and possible synergies may appear attractive. But how will other buyers perceive a competitor being a shareholder in a potential acquisition target?

D) Culture: Honesty and integrity are the ingredients for post deal success

Most seasoned buyers in the sector carry their own scars of a failed acquisition story somewhere along the line. The deal that was too difficult to integrate, or for which the team didn’t remain loyal once the dust had settled. Cultural alignment is invariably the common denominator in such examples in our experience.

What each buyer classifies as a virtuous culture will vary from organisation to organisation. However, honesty, integrity and self-awareness are universally recognised and valued. A healthy dose of pragmatism and honesty on what isn’t perfect in your proposition can paradoxically add even more weight to the positive assertions made on the attractiveness of the company.  

Cultural fit is of course a two-way street. Consider in advance how you’d feel becoming part of a larger apparatus (perhaps the very type you left to set up your independent boutique in the first place). Would a more entrepreneurially minded, semi-autonomous sale to a challenger consultancy feel more comfortable, even if that results in a lower level of cash out day-1?

E) Proprietary Differentiation: Difficult to successfully achieve but lucrative

Evolution into proprietary differentiation via software, along with the associated recurring revenue model that brings can significantly enhance value, bringing into focus a revenue multiple methodology for such revenue streams. A clear route to do so may also exist via the existing internal capabilities of your development team, and the experience they have gained on client software projects.

However, the road to the successful sale of proprietary software can be long, expensive, and ultimately distracting from the core profit stream of a consultancy player. Buyers are unlikely to strongly value a product without commercial traction, regardless of the capital investment you have made to date and the belief you have in its ultimate success.

F) Talent: Beyond key shareholders

An overdependence on key shareholders is a red flag for buyers. Demonstrating the ability to win work beyond these individuals is crucial if an owner manager is wishing to step away from a lead role post deal.  

A clear message on who these individuals are that will drive the business post-deal is vital. Internal confidentiality concerns are well understood by buyers, but access to those individuals at the right time will drive confidence in their capabilities and ultimately be value additive.

More widely, skilled consultant pools focused on niche areas are highly appealing and have driven the trend of ‘acqui-hire’ seen in recent years. Full-time employed staff are favoured over a predominantly contractor model (in case of the latter, be prepared for IR35 scrutiny).

The labour market in the sector has been fiercely competitive in recent years, even if it is now cooling. How have you managed wage inflation, how have you retained and kept your talent happy post-COVID? Demonstrable evidence via employee surveys etc. bring quantitative and qualitative evidence to paint this as a company strength. Concern over post-deal labour turnover sits high on the agenda for buyers. Do all you can to objectively articulate why they will be inheriting a loyal and happy workforce.

G) Operations: Clash of ideologies?

Do you operate a highly utilised workforce model with little bench time? A leaning towards time and materials billing vs an outcome or project model? This may well differ from potential buyers, who have the operational scale, flexibility and the high charge out rates to operate a lower utilised/bench type model. Larger global buyers in particular may not appreciate this nuance initially and time invested to articulate why this model works well to them is often worthwhile.

A demonstrable ability to recruit and grow headcount can be hugely attractive in niche consultancies. Buyer recruitment models often rely heavily on graduates and see high levels of labour turnover in low to mid-ranking roles. When combined with immediate strategic priorities and market evolution, it can be difficult for larger players to successfully recruit, train and fulfil demand from within. An aquisition target that can assist by successfully recruiting and growing has value beyond what the current workforce delivers today.

Other operational factors that can cloud buyer perception are wide ranging. Excessive overseas expansion that is not highly aligned to core service offering can be unattractive, particularly if that entails subsidiaries in bureaucratic geographies. Well executed expansion can be highly attractive, but without the requisite scale and capability, a satellite operation can be seen as a distraction from the heart of the capability a buyer is interested in.

H) Financials and performance metrics: Clarity is key

Lack of coherent financial information and associated KPIs can deter buyers, particularly if they consider an asset to be attractive on paper, but marginal in terms of scale. Poor or unclear management information is seen as an indicator of a tough road ahead in terms of diligence and subsequent integration from a buyer perspective.

Whilst you can’t pre-empt what every buyer’s post deal strategy would be, ensuring a clear growth plan is presented to articulate the opportunity on an organic basis is key. Articulate clearly why you will win vs the market and where this will be driven (new clients, geographic expansion, pricing uplift).

As discussions advance with prospective buyers, they will be creating their own calculations on what a ‘synergy’ P&L may look like under their ownership. They’ll be seeking additional value in areas such as charge out rate arbitrage, collaboration to win new projects and potential overhead efficiencies. Whilst the buyer won’t share all this insight, it is important to get under the skin of the incremental benefits a deal would deliver beyond your current financial performance. The greater the upside, the greater the scope to put upward pressure on deal value.

M&A in the consultancy sector:  What do buyers really look for in an acquisition target?

I) An emotional exit: Prepare mentally for what lies ahead

Often underacknowledged, exiting your business is a huge step emotionally. The rewards frequently bring profoundly positive life changes, encompassing both financial gains and the validation of creating something genuinely valuable.

However, given what is at stake and how much your company and team mean to you personally, a sale process almost invariably involves its fair share of ups and downs. 

How will you deal with challenges of your company during the sale process from a prospective buyer? And when emotive negotiation points arise, how will you respond?

We see mentally preparing shareholders before a process as equally important as following the traditional pre-sale planning steps all companies should be following. 

Why Rickitt Mitchell?

Here at Rickitt Mitchell, we possess deep M&A credentials within the consultancy sector, having successfully advised several companies explore their strategic options in recent years.

Our experience in the market, both within the UK and internationally has effectively provided us with a ‘front row seat’ on the attributes potential buyers find attractive, and therefore can be leveraged to enhance value in a transaction via thorough preparation and the creation of a clear selling story.

We believe our approach to M&A advisory leads to a higher probability of successful outcomes for our clients:

Kaine Smith | Partner

M&A in the consultancy sector:  What do buyers really look for in an acquisition target?