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November 16, 2008

Building value into your consulting firm for sale with Paul Collins, MD of Equiteq

Paul Collins is the definition of an extra-ordinary consultant. I first saw him speak in about 2002 and was transfixed by his story, and the advice he gave us. In fact, it changed the way I viewed my future.

While everyone else was talking about sales, marketing and relationship management - Paul was telling everyone how to build a company that you could sell for 7 or 8 figures - just like he did!

He started in the Consulting world since 1986. He founded WCI Group back then and grew it to over 350 consultants and $100m in annual sales revenues. In 2002 he sold the firm to Private Equity and in 2004 left the firm to setup M&A Advisory firm, Equiteq LLP . 

Paul and his partners now work globally in the area of consulting mergers and acquisitions , helping other consulting firms to grow, acquire and ultimately realize their equity value through a sale or inward investment.

CP: As I recall you were actually doing pretty well prior to starting down the path of building real value  in your own company. (prior to sale) What inspired this change in pace and strategy?

PC: From 1986 to 2005 we grew WCI from zero to £4m in sales and 15 full-time consultants. We had great fun, earned a lot of money but the money went as fast as it came and we weren't getting any younger! The annual income statement looked good but the personal balance sheet was flimsy!

I felt we had a choice in 1995. Either go and get a ‘real’ job with a pension plan or find a way of turning the firm into the pension plan. The former sounded pretty boring and I had a sneaky suspicion that I wouldn’t do too well being employed with a boss so it had to be the latter route.

Problem was we didn’t know how and most people we had spoken to over the years then had told us that a people business, where ‘all of the assets have legs and can walk out of the door at any minute’, would never have any value.

So in 1995 I spent 6 months researching in the City of London, talking to corporate finance, investment bankers, business brokers, private equity investors and pretty much anyone who would talk to me about how the ‘city’ would value a consulting business.

I got a pretty big shock!

No-one was interested in how smart we were, how clever our methods were or not even that interested in what we did. The only question that consistently got asked was “can you forecast future earnings growth and how accurate are your forecasts?”

Frankly it took me awhile then to even understand the question! We just sold to clients what we were good at and the profits came as a result, didn't they?!

Well that might be a good enough approach if you are just interested in making enough money this year to pay the mortgage. If you want to build real value in your business however, you need to be able to prove that the future in terms of sales and profits will be what you predict it will be.

As most consulting firms don’t have client purchase orders that extend out beyond a few months, we need to find surrogates for these PO’s. This starts with an understanding of your sales and marketing pipeline data IN DETAIL.
  • First you have to be able to show that historically your forecasts of future revenues and profits have been accurate. Most firms don’t even collect the data, let alone try and make a forecast.
  • Second, you need to know sales conversion lead times and percentages from one stage of the pipeline to the next. 
  • Third, you must be able to demonstrate that you have a history of repeat work in your clients and multiple points of relationship with client management. 
  • And last, you must demonstrate that your services are built upon intellectual property that belongs to the firm, rather than just the combination of the individual skills of your consultants.
Basically all these characteristics of a high value firm are about minimizing the RISK of any investment in your firm. If all of this exists then it reduces the risks associated with both client and staff loss as well as demonstrating that the leadership of the firm knows what they are doing!

CP: Is it necessary, or a distraction to focus on an IP strategy as part of a value building approach, and does software IP always attract a higher valuation?

PC: Building IP in a consulting firm is crucial to creating lasting value. There are only 3 assets of value in any consulting firm; clients, consultants and IP. (You could argue that Brand is also an asset but this only applies to the McKinsey's of this world so we will ignore this for now.)

A firm is valued initially based on forecasted and historical cash flows and this is usually expressed as a multiple of EBIT (earnings or profit before interest and tax) Valuations of 4 to 12 times EBIT can be achieved based on the absolute EBIT % and the growth of this figure over time.

It has been our experience that firms who have developed strong IP usually deliver higher profit percentages so this is the first benefit of IP in the valuation process. But it doesn't stop here.

The next step in any valuation is a risk assessment of how likely the future cash flows are going to materialize and this is where IP plays such a significant role in minimizing risk. Clients will buy from and stay with firms with IP more than those firms who just sell bodies.

Firms with strong IP can demonstrate that they are less at risk from losing good consultants because their IP enables them to train new staff more easily and reduce that dependency.

Firms can scale much faster and leverage junior staff if they have strong IP. I could go on but suffice it to say that we place strong IP high on our selection list when we are acting for buyers.

Software IP is an interesting one however and the answer regarding higher valuations for software than consulting revenues depends on whether the firm has become a software product vendor or whether the majority of the sales are still service revenues.

Whilst having software in a consulting firm makes a company more attractive to a buyer it doesn’t make a massive difference to the valuation so my advice would be to only develop software if it makes your services easier to sell to clients or makes your service more ‘sticky’ ie it enables you to continue an involvement with the client once the main service engagement has finished.

If however your software gets a life of it’s own and can justify a separate structure to grow and manage it then there is no doubt that software firms produce higher ‘multiples’ on valuation largely due to higher gross margins and longer license agreements than consulting. Basically they deliver more profit per sales $ or £ and have a less risky order profile.

CP: Many of our readers are independent / sole consultants, or they are planning to in the near future. What advice would you give them? Can a valuable and sale-able consultancy be built by a solo practitioner?

PC: Most consulting firms start with an entrepreneurial spirit with an idea. That idea might just be that they feel they can provide a better service to the same or similar clients than their current employer.

So whilst the sole consultant might start a consulting firm, it is not really until the essence of that idea and service has been built into the infrastructure of a FIRM does it really take on any significant equity value.

So the idea should be converted into IP that can be scaled across a number of consultants and clients. It must be translated into marketing and sales collateral so it can be made available to a large audience of prospective clients.

Once a market proposition has been created that attracts clients in large numbers and is delivered by consultants other than the founder with the idea, at that point we might have some real equity value.

So my advice would be to develop an idea that can ultimately be independent of you personally in both delivery and sales. To start with you might do both and that will be how you test your market proposition but ultimately if the value is to reside in your firm as opposed to you personally, it must be scalable to others.

After all, how could you retire from your business and take some money with you, if all the value was in your head!

CP: Do value building strategies change as the economic conditions change? What would be the priorities for growth / value for consultants today?

PC: Absolutely they do! Today, as a global recession looms ahead of us, we are advising our clients to focus on existing clients and just make sure that the business doesn’t shrink over the next 2 years. Growth might be a luxury in a recession.

Market propositions must also get more compelling and produce hard financial results in shorter periods of time.

Basically if you can’t pay back your fees well within 12 months then your services are likely to get cut. Firms who tie their fees to results will also prosper more than those who don’t.

There are many things that you can do to withstand a recession and to help our clients we have just produced a book called ‘100 Tips for Consulting firms to survive and grow in a recession’. It is aimed at consulting firm owners and full of things you can implement straight away. It’s available for free for readers of this blog.

(Note: This book hasn't been published yet. Paul has kindly let us get first look at it!!)

CP: You publish a lot of great information on the mergers and acquisitions markets in the consulting game. So with that insight what is the market for consulting M&A really like in the present economic climate, and is a sale a safer bet than a listing?

PC: Surprisingly, deals are still closing at a rate similar to last year but prices are down by about 20%. Whereas we would have expected 10 times EBIT for a good firm at the start of 2007, 7 times EBIT looks more likely at the present time. But deals are still being done and more and more buyers are coming into the market from parts of the world like the Middle-East and Australia that were historically not active in this sector.

There are still more buyers out there than good companies to buy but you might just have to accept a smaller price if you want to sell within the next 2 years. Prices are likely to pick up again in the latter part of 2010 and 2011. As for a private sale rather than a listing?  This is all about scale and personally I wouldn’t consider a listing until I had built a business of at least $100m in sales.

The liquidity in smaller companies makes the share price so volatile that you end up a hostage to fortune rather than managing a business where its value is based on the performance of the firm and your own personal efforts. Go to  if you would like to tap into the latest market intelligence in the sector.

If you are serious about building a consulting firm that the market will value in 7 or 8 figures, then I sincerely recommend Paul Collins and his work to you. 

I have followed him for many years now and I would use his services today without a shadow of a doubt. 

His site is brimming with valuable information , and he is an unequaled source of information relating to consulting mergers and acquisitions . 

With his team, he has developed a model of consulting firm growth that has been successfully tested on over 60 firms over the past 2 years called The Equiteq Growth Accelerator . 

This is available as a facilitated web workshop to firms globally.