Dec  2007  

Essential Facts
Top 10 Consulting Deal Breakers ... and how to avoid them

By  Paul Collins, Managing Director, Equiteq LLP

Paul Collins is the Managing Director of Equiteq, a british consultancy devoted to supporting merger and acquisition in the area of consulting and the co-author with David Cheesman of the  European Consulting M&A Report 2007

The process of selling a consulting business is a fragile affair full of the most delicate negotiations. Make a wrong move, unearth a surprise in your figures or lose a member of your team and months of meetings, due diligence, planning and drafting sessions can at best produce an eleventh hour stand off between you and your buyer, or at worst, scupper the entire deal. The truth is that for every consulting M&A deal announced there are many more that fail or never get past the courtship stage for a variety of different reasons. Read on to discover the ten most common deal breakers…and some tips on how to stop the wheels from falling off on your journey to the bank!

1. Taking too long to complete the deal
The risk of the deal failing over time follows the Pareto Principle; there’s a 20% risk of failure at the thin end of the time curve and 80% at the thick end. The longer time goes on, the more opportunity there is for something nasty to be found by the buyer and a greater chance of you falling out of favour with lady luck. Any one of the remaining nine deal breakers below could rear its ugly head as time drags on and a vicious circle will develop. Consultants are meant to be good at project management and this is the way to mitigate the risk! Before you take your firm to market, make sure you have all the bases covered in the sale preparation and get the right resources ring-fenced so that all eyes are on the important balls.

2. Shareholders who have conflicting interests
If you have a complex share ownership structure you don’t want things getting messy when the buyer comes to the table. While you as the main shareholder may be highly motivated to sell, or settle for a certain deal structure, perhaps a junior director who hasn’t yet earned all his/her shares will be on a completely different page. If this comes out when the buyer interviews key staff things will get complex and it will be difficult to strike a deal. The only way to ensure this doesn’t happen is to resolve these issues with each and every shareholder in the process leading up to the decision to enter the sale process.

3. Missing your financial forecast during due diligence
Missing your financial forecast during the sale process is very bad news, the buyer will worry about your financial management and may want to dig deeper and deeper into the cause, which in turn may uncover additional issues as they drill down layer by layer into your financials. There are some things out of your control, but it’s within your power to make sure that you’ve a robust financial management and forecasting process and to choose the time to take your firm to market when you’re confident in the stability of your numbers.

4. A sales famine while buyers are looking
This is crucial because the profit multiple the buyer is prepared to offer is significantly dependant on their confidence that your profits will continue into the future. Clearly, if your pipeline reduces unexpectedly during the sale process then a fuse is going to trip in the buyer’s mind to trigger a deeper examination of your sales and marketing process and a possible reduction in their bid. Depending on your sales cycle time, you need to put a concerted effort into sales and marketing in advance to make sure that the engine is tuned and everything stays on track during the sale process and beyond. Getting this right will also reduce the risk of missing future financial forecasts in earn-out circumstances or when your deal structure relies on future targets being met.

5. Key people defecting part way through your sale
Losing a senior or key member of your staff during the process will do two things for the buyer; first, they will question the quality of your HR management and second, want to re-assess the value of their prospective acquisition. Keeping hold of key people at this crucial stage comes back to the measures you’ve taken to lock-in key staff well in advance of sale. If you’ve introduced motivational reward and recognition programmes along with an equity share ownership scheme, then you’ve probably done the best you can to reduce this risk. Don’t forget that 70% of something is worth more to you than 100% of nothing!

6. Management getting cold feet
Deals can fall apart simply because owners have reservations or anxieties with selling the firm and the professional and personal stress that comes along with that. Not being crystal clear about the motivation for the sale part way through the sale process is bound to cause personal strife among the shareholders and irritate buyers. You don’t want to change your mind half way through, so don’t enter the process half-heartedly, have clear objectives in mind and for each individual, pin down who wants to stay and who wants to leave and in what period of time. Do this and everything will be on the table up front and there will be much less scope for prevarication and indecision.

7. Nasty surprises in your finances
The last thing you want during the pressure of due diligence is for the buyer to discover an ignorance or lack of understanding about the financials in your business, or even uncover something nasty that you should have spotted and dealt with in advance. This could be a simple accounting mistake, or a hidden bombshell like a fraudulent entry. If you have a finance director with an eye for detail and with whom you would trust your life, you’re probably covered. If you’re not in this enviable position, then take measures to get your accounts professionally audited and don’t enter the sale process until you’ve tested and retested your complete command of the numbers that govern the shape of your costs, revenues and profits in the business.

8. A buyer with the wrong culture
Too many deals never get off the ground because of a culture mismatch between the seller and buyer. The buyer is going to walk away if they think integration is going to be difficult, and you’ll walk away if you’re worried about how your staff and clients will be able to work with the new entity. So make sure you get it right.  Similar values, work ethic and approach to business all help.  The chances of cultural alignment are improved if you’re talking to buyers that have been carefully researched and selected by your M&A partner because of their ‘best fit’ characteristics with your firm. This is particularly important as the deal progresses through the due diligence phase when it’s likely that your team will have to meet at close quarters with the buyer’s management team to work on integration details. If your teams don’t get on together the deal could be in jeopardy. It probably means starting the whole process from scratch at a later time and dealing with de-motivated shareholders rueing missed opportunities.

9. Not understanding the buyer’s position
When all the pleasantries are over, it always comes down to price. I’ve never met a seller who didn't think their firm was worth more to them than it was to the buyer! Many owners are just unaware of the realistic sale multiples in the consulting industry, have never had their firm properly appraised, and they start with a view of the value of the firm, without being able to sell that value to the buyer. If you’re going to drag the buyer over the bridge between their price and yours, you need to be able to justify it and not come across as plain greedy. The best way to do this is have a sound understanding of deal values in the current consulting M&A market and a detailed understanding of the synergy value of your firm to the specific buyer, something for which they will be willing to pay a premium. In short, it’s all about knowing the market, salesmanship, and seeking out a range of buyers with synergy who want to compete to buy your firm.

10. Plain bad luck
With all the best planning in the world, something unforeseen and unimaginable inside or outside your firm could happen. The best you can do is to plan for the expected and unexpected just like you would with any other event in your organisation. However if there’s one thing on this scale that’s most likely to thwart your progress to sale it’s your client market collapsing for some reason during the deal process. If all your eggs are in one basket then the risk goes up, so diversity in your clients and markets is the ideal way to be as safe as you can be from external issues. But, back to our first point, the longer the deal takes the more likely you expose yourself to bad luck, so aim to complete a deal as fast as possible.


Paul Collins
Managing Director

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Rapport 2007  :
Equiteq report

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