While acquisition appetite has stifled in the last nine to 12 months, the fundamental drivers remain present. We routinely see valuations of high single to low double-digit EBITDA multiples in the space for strong businesses. Multiples are sometimes pushed beyond this where the opportunity cost of a buyer not having the required skilled resource to successfully deliver lucrative multi-faceted projects is much greater in value than the EBITDA stream they are acquiring.
In such situations a buyer has its own internal view of the post-acquisition P&L of an acquisition target, which is likely to show an EBITDA figure substantially higher than the stand-alone organic figures presented.
Risks at play
Any transaction will not be considered a complete success without true cultural integration and maximisation of revenue synergies post-deal. Cultural misalignment and lack of commitment from acquired consultants post-deal remains at the heart of acquisition risk in the sector. So, how can this be ensured? Mechanically and legally structured deal terms, earn-outs, equity participation, and restrictive covenants can assist in avoiding these problems.
Counter-intuitively to a seller’s initial instinct, a good buyer should pay any enhanced or deferred consideration out in full and strive to proactively support in achieving this. Buyer and seller mutually sharing in post-acquisition success in a culturally integrated environment is the best formula for a long and successful marriage for both parties.
It may appear that a seller who achieved a sale that saw shareholders receive the majority of value from day one, but then left post acquisition due to lack of alignment, has achieved a relatively successful outcome overall. In reality this is rarely the perception of those shareholders who likely spent many years and long hours crafting a successful strategy, only to miss out on significant upside and see their cultural fabric and loyal employee base erode.
All strategic buyers have their own acquisition pain story, although there are more positive than negative stories on the market. Experience counts for a lot and the M&A market in the sector is better for these lessons learned. Given this, how does a buyer defend against cultural risk on a softer level? Deeper diligence focused on operational and cultural alignment is essential. Acquirers now invest significant resources in workshops and lengthy courtships with targets (sometimes including direct commercial collaboration) to ensure the alignment is real.
A slow and measured integration policy also helps, with targets continuing to operate semi-autonomously indefinitely in some cases. The depth and stringency of this diligence tends to be lighter in the case of challenger consultancies, which are more likely to give license to an autonomous operational structure post deal. Fundamentally, from a buyer’s perspective if a target’s core capabilities are desired, and true cultural alignment exists then the license to place upward pressure on valuation increases, as does the level of pragmatism seen on any wider perceived weaknesses.
So, what of the future? Accelerating technological complexity and talent constraints in the UK remain fertile ground for M&A irrespective of the inevitable economic cycles the sector passes through. The rise of AI may leave smaller players at a competitive disadvantage in the longer term, although at present this will empower rather than cannibalise the requirement for skilled talent in the market.
Established in 1976, Rickitt Mitchell is an M&A advisory firm which has completed over 300 transactions in its history – with a combined value of more than £4 billion. The firm’s team has developed specific expertise across a number of sectors, to support clients of all shapes and sizes.