The Consulting Growth Podcast
Joe O'Mahoney is Professor of Consulting at Cardiff University and a growth & exit advisor to boutique consultancies. Joe researches, teaches, publishes and consults about the consulting industry.
In the CONSULTING GROWTH PODCAST he interviews founders that have successfully grown or sold their firms, acquirers who have bought firms, and a host of growth experts to help you avoid the mistakes, and learn the insights of others who have been there and done that.
Find out more at www.joeomahoney.com
The Consulting Growth Podcast
Mastering M&A in the Consultancy Sector: Jerome Glynn-Smith of Equiteq
Unlock the secrets to a triumphant M&A journey in the knowledge economy with Jerome Glynn-Smith, the Equiteq's Head of Europe. As a former JP Morgan and Deloitte luminary, Jerome provides wisdom on the pivotal role of specialization within the technology and professional services sectors.
Our chat navigates through the critical $10 million revenue threshold, the allure of private equity in the consultancy sphere, and the delicate art of balancing risk and scalability for consulting firms on the brink of a sale.
We dissect the valuation conundrums and profit trajectories that influence the consultancy industry's M&A trends and shine a spotlight on the non-negotiables of EBITDA evaluation. Jerome also weighs in on the potential pitfalls of diversification, urging firms to sustain a laser focus on their core services to cultivate a tantalizing appeal for prospective buyers.
In our final exchange, Jerome lays out a roadmap for boutique consultancies anticipating a sale. Aligning stakeholders' visions, bolstering market presence, and maintaining a pristine and comprehensive data room emerge as the cornerstones of a well-prepared exit strategy. By championing specialization and crafting a compelling equity narrative, Jerome assures us that small to medium-sized firms can navigate M&A transactions with the precision and confidence of seasoned pros.
Prof. Joe O'Mahoney helps boutique consultancies scale and exit. Joe's research, writing, speaking and insights can be found at www.joeomahoney.com
Welcome to the Consulting Growth Podcast. I'm Professor Joe O'Mahony, a Professor of Consulting at Cardiff University and an Advisor to Consultancies that Want to Grow. If you'd like to find more out about me and access some free resources to help your consultancy grow, do please visit joeomahonycom. That's J-O-E-O-M-A-H-O-N-E-Ycom. Okay, welcome back to the Consultancy Growth Podcast. I've got the real pleasure of being joined by Jerome Glynn-Smith today, who is the Managing Director of Investment Banking at Equitech and, I believe, head of Europe in Equitech. Is that right, jerome?
Speaker 2:That's right, Joe. I thought the head of Europe was Angela Merkel, really up until the moment when it became me. No listen, that's absolutely right. I'm looking after the business that we have here in Europe, which is essentially our setup out of London, with a smaller group we have in Paris. Thank you, and Equitech.
Speaker 1:Before I go back in time and ask a bit about your own background, Equitech is am. I right in saying it would be the biggest firm that's purely focused on sort of professional services and tech in the M&A space.
Speaker 2:So in terms of propaganda, I think we would always say that we're the best doing this. But no, on a more serious note, I think in terms of size and it depends how you sort of look at this Is it kind of number of transactions, number of people, size of transactions, or is it simply just the breadth of the network and the expertise which is more sort of qualitative and maybe harder to sort of express in league tables and various sort of marketing pamphlets? But I think we've grown as a business, that's for sure, over the past sort of four or five years. We're now looking at mid-70s number of sort of specialized investment bankers focused on the knowledge economy and particularly the consulting industry, and in that context, you know, with very global teams in that as well, we do believe that we are the largest firm globally at this point.
Speaker 1:You're focused and one of the reasons I'm very kind of you to come on, but one of the reasons I really wanted to get you on is because you are very specialised. You don't do everything and anything that comes your way, and I think that's quite important when it comes to really understanding the intricacies of professional service firms and the knowledge sector.
Speaker 2:Thanks, joe. I think that the point you're highlighting there is a sort of key point of our DNA and how we've built our business. So we're operating in a pretty competitive space. I think I'd probably be one of those to say that the market's overbanked to some extent. And one of the sort of founding principles of Equitech, alongside sort of selling the expertise and bringing in a real level of international reach that goes through our governance model that's different from others, I think, is to be very, very focused.
Speaker 2:And we are focused on the knowledge economy, which is a sort of sophisticated way of saying, sort of white collar professional services, and I think over time the requirement for us to be further specialised, even within that, was very real. So within that there are probably two sort of main blocks. One of the blocks is probably the consulting industry, as in the consulting industry that's further away from technology consulting, which is the process, consulting, innovation consulting, supply chain management, strategy consulting, which is one block of business, and then on the other end there'll be the technology services and technology consulting, which will be your system integrators, your application development businesses, data businesses and what we've seen as we've grown equitech is. The volume of deals in the market is probably 70 30, with 70 of the deals being in that technology services, technology consulting block and 30% being in the consulting block and those two blocks also talking to each other, with companies from the one trying to do the other and vice versa, and that also creating a catalyst for M&A between those two large segments of what we do Yep, great, great.
Speaker 1:Okay, so that's the present. I want to skip back a little bit to the past and just really hear a little bit about your story. You've had quite a stellar career with some good names, but you've also shot up the ranks fairly quickly. So tell us a little bit about how you got to where you are and why you focused on this precise role with this company.
Speaker 2:It's quite a personal question really, joe and I think I probably ended up getting into investment banking this was late 2000, 2007, early eight as a result of being quite a generalist and being quite interested in working with high quality people and it was really as simple as that Probably a bit impressed as well at that age of the brand of banking, which back in those days it's certainly no longer the case now. But you would kind of figure out whether you wanted to go into Goldman Sachs or go into BCG. Those were your options and that was what was cool and I think, that situation's changed a lot actually these days, but that's another topic altogether.
Speaker 2:So I ended up through that, going into JP Morgan and starting my career there and the first sort of early years of investment banking, and I think where that took me was obviously a fantastic training ground. But it took me to a place quite quickly, within sort of three years post the analyst cycle, where I wanted to focus on the mid market. And why was that? I was given the opportunity to work on something a bit small towards the end of my tenure at JP and it kind of gave me the taste of what I wanted to do, which was essentially working with people that hadn't done this before and that needed advice rather than people that sort of needed process. So I ended up transitioning from that type of banking to a mid-market advisory with Deloitte in the lead advisory group there, where I was doing many more deals, much smaller deals and a lot of them with sort of mid-market private equity, and this at that time was a sort of generalist role, also a role in France. So it went through all the things that you can think of that the French are good at, from sort of deals in motorways through to yogurts, through to missiles, through to women's lingerie, through to swimming pool manufacturing and all sorts of things that the French are good at. So very generalist. And I think one of the industries that I particularly enjoyed during my time there was the IT industry.
Speaker 2:With a deal that we'd done with Atos, and so this was in 2012, 2013, I decided to make the move to another bank that was a much smaller boutique, really specialised in the IT industry, called Vendors Capital, which was a homegrown business out of India that had internationalised fairly recently at that time in New York and London. Through that I became a specialist and was kind of convinced already then that this job as an M&A advisor only really makes sense when the people that you're engaging with actually feel that you know a little bit about what you're talking about. Right, and I do insist on a little bit, because we'll never be experts as people that are running these businesses and founded these businesses and that know what the client proposition is and how it's delivered in the detail of how it's delivered. But we will understand things. You know, business after business after business.
Speaker 2:When you see hundreds of businesses in the same space and you talk through their problems and you talk through their opportunity. There is overlap there and you get to understand that and I was sort of very keen on building that expertise and stayed for seven years at a vendor through also a lbo that we personally did where we became a majority portfolio company of kkr, which is a big us private equity house. So and then I think, through an interesting actually going through a deal yourself when your day-to-day job is actually advising deals for other people, and seeing it from that perspective, because shoes on the other foot now, isn't it?
Speaker 2:exactly. I think the strategy of kkr was actually to broaden the base of revenues for vendors, make them more sticky, capitalize on the opportunity in india, which was sort of faster growing and more immediate in that context than the opportunity internationally, and that led to me joining Equitech in 2019, actually with a few people also from Avendus. I guess it's that point. Five years ago, equitech had already taken the curve towards that block of technology consulting that I talked about, but it was historically more of an expert in traditional consulting and you know we were and I was built sort of specialization in technology consulting. So that marriage came quite well and I think one of the things that was really important for me was to be able to work with entrepreneurs or first round private equity funds that hadn't done this before and that needed advice and valued specialist advice, and Equitech was the perfect place for that.
Speaker 1:Yes, I can see that, and you've got a good team around you, I guess for the listeners. We've bumped into each other a few times over the years, most recently with clients, but certainly when I was writing my growth book. It was hard to find things to write about that Paul Collins, who founded Equitech, hadn't already written, so that was always a bit of a struggle. I've got a list of people that don't know I run a boutique leaders club and they've given me some questions that they would love to ask, and the first one is around this mystical 10 million figure number, and I think we both know you can sell a firm for any size. However, it gets more difficult the smaller it gets, generally in professional services.
Speaker 1:Why is this 10 million target for revenue around that point, or visibility of 10 million, a game changer when it comes to multiples and the ability to sell your company? Or is it why the question?
Speaker 2:I think it's an interesting. It's a very good question and you had it asked in different ways over the years at 10 million? Is it 15 million? Is it 8 million? Is it also you often hear this in its translation in number of people. What I've heard over the years.
Speaker 2:I remember working with one of the largest consolidators in consulting globally and they were looking at 100 people right. Anything below 100 people was what they would look internally in their committees as something subscale Give or take. 100 people in a UK context is normally just about 10 million or more than 10 million, and that depends on whether you're doing strategy consulting or whether you're doing something more commoditized around IT consulting. But that is a good mark, I think. Out of all the different markers, I think the 10,100,000 person is a marker and that is very much our opinion here. The second thing I'd say is I think that the reason for that is connected to the inherent curve of risk that there is in growing a consultancy business and maintaining it at a certain level when it is a small scale. So what we've seen is that small scale consultancies are normally highly dependent on their owners and their black book. The diversification of the sales cycle is limited, the dependency frequently on a few frameworks or a few clients is high and that all of those things decrease as you get to scale, and I think what that means is that something suddenly becomes sellable. Someone else is happy to take on all the opportunity and all the risk of this business in a context that may or may not involve the owner post-completion, and that's really why that becomes a marker.
Speaker 2:Now I think I wouldn't say that there's no opportunity to sell a company. If you're a five million pound company, I'd say there's likely to be a lesser amount of interest. There's likely to be transactions that are cheaper from a multiple perspective and also lower from a cash component perspective. So the structuring of your transaction is likely to be less cash heavy the smaller you are likely to be less cash heavy the smaller you are. So you know, if you are a sort of two million pound consulting company and you feel that you want to sell because you can't scale this more, or you've come to a point where you feel that you know the market for the services that you sell is going to be more adapted to larger companies, can sell, but it's likely to be a transaction that will involve a stock swap into something else rather than a large sum of cash at completion.
Speaker 2:So it's really I think the 10 million market should be seen as something that then gets you into a more vanilla type of consulting M&A market where you're expecting transactions to trade between six and a half to seven times EBITDA, all the way to 15 times EBITDA, depending on lots of things associated to your activities, to your level of growth, the prospects for the business, etc. With a decent amount of cash at close and then potentially some stock and potentially an earn out. That's what I'd call the vanilla consulting M&A market, and that that starts at 10 million onwards, um, but below that it gets more creative. Now there's just maybe one more thing that I'd say, joe, is that in the about this sort of 10 million mark in the recent years we've seen at equitech more and more private equity capital being deployed into the consulting market, which, if you look 10 years ago didn't used to be the case at all.
Speaker 2:And private equity houses come in all different shapes and sizes and fund sizes and have a certain amount of capital that they need to deploy over time. Right, some will actually have a close end funds that need to deploy capital. Some will have more flexible pockets, but they are normally investing a pocket of money that then enough, you know, for the smallest funds can be 30 million, 50 million, sort of mid sized funds. It could be three, four, 500, 750 million, and some of the larger funds are obviously in billions, and so what that means is that when you're a 2 million or a 5 million company, not only there's that inherent risk of the sustainability of that company without its founder being the owner.
Speaker 2:but it's also quite a small company that has quite small value presented to the private equity. That are normally pretty small firms with not a lot of employees right, they might have five employees, 10 employees, 15 employees, 50 employees for the bigger ones, and not the very big ones which go more than that. But for with not a lot of employees, right, they might have five employees, 10 employees, 15 employees, 50 employees for the bigger ones, and not the very big ones which go more than that, but for the bigger ones. And so they're investing pockets of money that are very substantial, and so they don't really have the time to resource capital going into a 2 million or a 5 million consultant company, and so the private equity market isn't really in that segment of the market either. So not only that sub 10 million is this place where deal-making is more creative, but also private equity money is not there, and that also creates, I think, an additional sort of hurdle to get over when you are a two, three, five million pound consulting business.
Speaker 1:Yeah, yeah, thank you. That's a really solid answer and chimes with my own experience, I guess. One thing I'd add, if you agree with it certainly for strategic buyers, it's almost as much work to buy a $50 million company as to buy a $10 million company, and you want something that's going to move the needle when you've bought it, and the smaller firms wouldn't tend to do that.
Speaker 2:Yeah, I agree with you. However, there might be one thing mitigating this and I think, if you look at the history of consulting firms selling right the consulting M&A market, I don't think there's been any other time in history other than this period that started over the past kind of 18 months and is still very much a reality today where small consulting firms have exit options. I think that that 10 million mark is a reality today and we've just discussed that, but that five years ago we were talking about a 20 million mark and the reason why that's gone down is because these companies that would like to find 20 million, 20 million, 30 million, 40 million, to move the needle as you put it, actually aren't finding them.
Speaker 2:And when they are finding them, they're normally invested by private equity and require a very high multiple to exit and on top of that, on top of scarcity, there's also the fact that a lot of innovation has come from small companies, come from small companies, and if you look at certain areas that have been in very high demand, such as consulting around the public cloud, for example, or consulting around data and analytics, you found that those businesses tend to be in and around 10 million. They tend to be in that sort of 7 to 20 million place, and so they've kind of been forced into that, because that's where the innovation is, and that 40, 50, 80, 100 million pound consulting companies have tended to be less specialized, more commoditized, broader and older, and that's been sort of genuinely less attractive.
Speaker 1:Yeah, I think that's a really good point and a really interesting. We could almost have another whole podcast on the balance between sort of exploit and explore the balance and how that correlates to the growth of companies and the size of companies. But you and I will have seen many large companies in effect buy their innovation from smaller firms and in some ways it's a cheaper way of doing it because you're only buying the ones that have made it to 10 million. So you know there must be something there that's working, yeah, interesting. So we talked a little bit about the revenue side of things.
Speaker 1:I had another question from one of the members. Around the profit side of things, and, as you all have been, as has been very visible to everyone, the last few years have been fairly rocky for the especially boutique consulting industry, but I think, more lately, of the large firms as well, and so what I've seen a fair bit is firms that have grown fairly steadily and then either COVID or 2023 has hit them quite badly, and so the profit isn't necessarily there and sometimes the revenue's been hit. Are you finding that buyers or investors are taking that into account and making exceptions for the economic conditions we're in, or is there such choice available to them that they don't need to.
Speaker 2:Okay, I think EBITDA has always been the metric for valuation of the consulting M&A market.
Speaker 2:I think it was the case historically. You're sort of looking at 10 years back. Some of the podcasts and some of the research in the industry were sort of positioning this market as a five six times EBITDA market, which it was, and then that multiple evolved over time and it became very high, I think in 2021 in particular, and some of that spilled into 2022. And then now it's gone down a little bit, although that's still sort of an analysis that's quite fluid, because the deal volumes have gone down and actually what we've seen over the past year or so is that the volumes were so low that the deals that actually did happen were quite high quality deals that were resilient to the overall difficulties in this market, and so ended up going at quite good valuations too, but the general feel is that the multiples over the next two years will probably be lower than over the past, what they have been over the past over the 2021-2022 period, but still probably one of the highest that they have been over the 10-12 year cycle.
Speaker 2:Now, coming to that, I think EBITDA multiples always translate into sales multiples, right? Ultimately, it's maths. You're buying a company for 10 times EBITDA. That's worth a certain times sales. If the company's a 10% EBITDA company, then it's worth one time sales, right? If the company's a 30% EBITDA company, then it's worth three times that.
Speaker 2:And I think the whilst investment committees of private equity houses and in trade companies, people are looking at revenue multiples, the basis particularly as we've come into a more difficult market in 2023, is very much to look at profits. Now, what kind of profits? And is there scope for adjustment for a difficult environment? No, but I don't think that any consultancy today that would want to sell would particularly be affected by historical difficulties with profit over 2023. And I'll explain why.
Speaker 2:When you sell your company for investment to private equity or into trade, what's being bought and what the enterprise value reflects is a future estate in terms of the cash flows generated by the company, the prospects of the company of taking market share and growing, and if that company has had a difficult 23, or a difficult end of 22 and 23, that's already passed and so you wouldn't seek, in the preparation of your EBITDA, to adjust for the past, the past of the past.
Speaker 2:I think it's relatively well acknowledged that the past 18 months have been hard, and anybody investing in a consultancy now is looking at the future, and it's really that future that you'll seek to have a level of EBITDA that is something that's ascertainable and that is normalized to the right level to apply multiple. So that's what I'd say. I mean, I think it's more about the recovery from the past 18 months being able to show the direction for 24 and 25 from a revenue growth perspective and an EBITDA EBITDA can't be ignored rather than trying to sell to a buyer that the last 18 months wasn't the reality or needs to be normalized, or it was just the reality of the market where all companies have this yeah, so in a way it's everywhere, yes, and that's kind of well understood as being everywhere.
Speaker 1:And I'm presuming that if you are one of those few lucky companies that hasn't been hit or at least has continued to grow EBITDA and top line over the last 18 months and you might be able to charge a little bit of a premium for that, because it indicates that you're perhaps resilient to recessions and other downturns.
Speaker 2:Yes, that's absolutely right. Now, my personal opinion on this is that companies that were founders of companies or private equity invested in companies that were in a mindset that they would sell in the short term, and the short term I kind of define as anywhere. Anything that's less than 12 months should probably have sold over the past 12 months If they were one of those companies that you've mentioned that was very resilient through last year, and we've seen this in healthcare consulting, particularly in some pockets of the public sector. There has been resilient companies, and the companies that were in market over the past 12 months were far and few between, and so they did get absolutely a premium, and some of them actually got 2021 multiples although we were in 2023, just because there was nothing else to look out for trade and private equity.
Speaker 1:Yeah, yeah, okay, yeah, good point. Well, I hope there's some of those companies out there that are listening to this are smiling now, so that's a positive note. I had another question shifting slightly here, and it's something that I come up against. A lot is diversification of firms and typically and I'm sure you've seen dozens of examples of this where there's a firm and it's got a niche and the niche is doing reasonably well, maybe growing 15% a year, maybe they've got 15 to 20% margins and they've grown pretty well up to the I don't know 7 or 8 million mark, and the CEO has an idea in the bath about expanding to the Middle East, or one of the directors has a great idea about developing an AI tool or something along those lines, and so there's this.
Speaker 1:Or perhaps someone thinks, well, we need to move up market into strategy where we can get higher margins. Now my general advice in these situations is look, stick to your knitting until the knitting works or you know whether it works or it doesn't and if you've grown this far, there's presumably a bigger market. I guess there's two questions here. One is in terms of balancing risk and reward when you're a company that's coming up to sale perhaps two or three years down the line and you think, oh, we could be doing something much more profitable.
Speaker 1:And you get a lot of these owners who are looking at the tech multiples and thinking, well, we could do that as well as doing our people stuff. So that's the first question is how would you advise owners to balance risk and reward when thinking about diversification coming within sight of a sale? The second thing is, I guess, what buyers are looking for in that if I was a successful boutique in the UK and decided I'd done as much as I could in this market and wanted to expand to the Middle East or perhaps develop some new service lines, am I in danger of putting off some buyers who might already have a strong Middle East practice and aren't particularly interested, or aren't interested in the Middle East full stop, or perhaps aren't interested in some of the new service lines that I'm developing? So I guess this is a question around your view on niche and the extent to which boutiques could and should diversify. I realise it's a tough question to answer because the obvious answer is it all depends, but generally speaking, what have you seen over the years?
Speaker 2:Yeah, I think that's right. The obvious answer is the very unhelpful answer of it depends, right, sure, but I think the answer it depends is very unhelpful when there's lots of variables and you're not sort of honing down on any solutions.
Speaker 2:I think there is one variable that is very strong here and it really depends on that variable, which makes the it depends answer a bit more helpful which the the variable of horizon to sell right, I think, if we're talking about someone selling within 6 to 12 months, we would not um sort of see diversification as anything that's going to add value.
Speaker 2:What we see is that any form of diversification, whether it is place in the value chain, whether it is sector, whether it is geography, will require some form of execution over a period of time that will be a minimum of six to 12 months to actually see through that risk and capture the opportunity. And while investments can be normalized in the EBITDA come back to the EBITDA conversation for the sale it still creates a complexity of where the value proposition is of the company on something new that's unproven, and so if the timeline to sell is that sort of six to 12 months, then we would very much advise not to go into something. To go into something If the horizon is more long than that. I think and this always needs to be kept in mind with the idea that when you've sold a company, it's not that you sold it it normally comes with four or five year private equity cycle or a two, three year handholding period through an earn out.
Speaker 2:So you've almost you know when you're looking at what you're thinking about. It goes further than the time to sell. But if your time to sell is further than 12 months for consultancies of small scale and by small scale, I would say in a UK context, it's probably different in America or in some big European economies, but in a UK context I'd probably say anything below £25 million of revenues is on the smaller end, and I think being able to sell a story of specialist consulting rather than generic consulting and being in a niche is hugely valuable to your equity story and to your ability to successfully sell, and so diversifying too much is risky. However, diversifying in a place that will add sophistication, stickiness and value to the service offering is right. So I'll give you an example. If you were a consultancy specialized in compliance and governance for healthcare let's say public sector healthcare and you were thinking about diversifying into FCA consulting and financial services compliance consulting, that would be quite risky and hard to execute and a proposition, at the end of the day, for a small company that might be less valuable than being just bigger.
Speaker 2:And at what you fundamentally do, which is healthcare compliance and governance, if you are able on top of your core area of specialism, which in my example, is healthcare consulting governance. You would diversify into making your delivery more automated. You would diversify into including an element of digital delivery and an element of, maybe, a platform that you leave behind once the consulting project is done, or whether you are able to manipulate and use data through the hiring and development of a data analytics team and you're able to embed that in your offering. You're actually diversifying. You're not fundamentally diversifying in your sector addressable market. You're not diversifying in geography. You're not saying let's all go to the Middle East, but you are diversifying in the quality, the sophistication and the stickiness of your offering. I think in most cases, I'd focus there because that is where the value is, rather than saying we need to be in Germany or we need to go and address the financial services sector when we're a healthcare specialist.
Speaker 1:Thank you. I think that's a fantastic point and I think very often I'll come across firms that have been selling the same stuff in the same way for 10 years and nothing wrong with that. But having a good look at your services how they're delivered, why they're delivered, the way they are and the potential of technology to enhance them, I think is a fantastic insight there. I have one final question, jerome, if you have time, and that is around, what you, I guess Equitech, and what you would advise specifically for a firm that was a year away from sale. Perhaps they've come and contacted you, perhaps they've taken you on, but there's another, perhaps 12 months before you get there. What types of things would Equitech be looking at to enhance that firm's value and asking the firm to do a bit of work on that side, above and beyond the normal day-to-day consulting work that they would be doing?
Speaker 2:I think it's an interesting question. It's actually got a good segue with what we were just talking about related to diversifying, and I think, fundamentally, a business is one thing and when you're 12 months away from a sale, you shouldn't embark in deep sort of changes in terms of the value proposition, in terms of the delivery, in terms of the geography, in terms of a firm is a particular firm and needs to continue what it does really well in that year up to the sale. So I think the things that you do work on, which I'll talk about now, are more related to transaction readiness and marketing of the company in the market, rather than fundamentally changing what that company is, because there isn't time to do it and it's much too risky to do it within that sort of 12 month period. So, in terms of the various things that we look at, first of all, it's very important for a company to be on the radar. So there are lots of, at the scale of companies that we're talking about here, which is, I'm assuming, the sort of sub 25 million pound revenue market, there are a lot of companies are founded by people that have done this before and that are all over the market the minute they've sort of a name above the door that some others are not networked in that market of M&A. They've been focusing on their business, they've been with clients, they've been focusing on those sort of fundamental things rather than networking in the M&A market. So actually making sure that people know that there is a great company X that does these things really well and that will be in the market within 12 months, 9 months, 15 months, is a very fundamental thing. So creating some the right sort of noise and the right sort of brand for the company through networking and through also activity within some areas of specialized publication is important.
Speaker 2:The second thing is, I think, as a group of shareholders of that company, if there's more than one shareholder and a management team actually aligning on what you want to do, what kind of change in the cap table would make the most sense for all those stakeholders to have a sort of successful future and next sort of phase of growth for the business? Does that mean that certain shareholders need to leave? Does that mean that other shareholders need to fully roll over into a new structure? Does that mean that the success of the business at this point in time culturally has been driven by people that are very autonomous and independent and therefore may be doing a deal with either a private equity house or a foreign and international trade that would give them a lot of autonomy is fundamental because otherwise it would break. Or actually, is it the other way around? Is it that the management team feel that they are not scalers? One of the fundamental reasons why they're selling is that they feel they need someone to take them to 25 million or to 50 million, because they can't do it on their own.
Speaker 2:Therefore, actually, is a private equity round going to be too risky, or is an international trade going to be too hands off for them to actually succeed? So what do you want to do? How does that align to also personal ambitions Because selling shares is not only a financial decision but also an emotional and personal decision for people to do that, and how does that fold in with how people want to live their lives post-transaction and actually being able to be very open on all of those things doing them and having that conversation, potentially facilitated by an advisor, that's, a third party that can ask those questions in a very straight way and certainly in a different way than business stakeholders that have been working together for years and years on. A business is fundamental to getting things right.
Speaker 2:And then I think the third piece is preparation of the data room and the equity story. So don't wait until the last month of distributing the IM and the management presentations to know whether you do think the future of the company is building more data analytics offering or is going to the Middle East or and start also preparing a data room with the advice of an advisor that has all the stuff that's needed and it's a lot of stuff and frequently from our experience, what we see is that a company will probably have it depends on which scale, but the scale we're talking about will probably have only 50% of what's actually required for a process. So a lot of things need to be prepared, and the way a company is run is not always with the same level of data and granularity as required for a process. With the same level of data and granularity as required for a process, I mean the typical, the most obvious example of something that companies don't already have in consulting is accrual accounting and web accounting, where companies tend to account for things on a cash basis rather than an accrual basis, and that's not how any buyers would consolidate revenues. So that's the first thing to look into.
Speaker 2:A second thing is everything related to forecasting, and a forecast is frequently based on a gut feel from a founder or something that is derived vaguely mathematically from previous periods.
Speaker 2:But in reality, what a process requires and what investors and acquirers need is a view of client by client what is contracted, what is in the pipeline, what is weighted in that pipeline and how.
Speaker 2:Also, it gets realized month by month into recognizable revenue on a WIP accounting basis, month by month through the current year, and then that gets you to a number Y and then normally higher you to a number y and then normally higher than the number y is the number z, which is the gap. And how does the company plan to bridge that gap and how will it? Will that then go from pipeline into contracted and into delivered throughout the year on a month by month basis and on the basis of recognized revenues as opposed to contract value? And a lot of people don't have that. And actually starting to work on those things the minute you've got an interested acquirer saying I'd like to see those things puts you on the back foot immediately. Yes, and where you're going to have power in these processes is having a high degree of really well-packaged, quality information and not being on the back foot with it.
Speaker 1:Yeah, that's fantastic advice. I mean, certainly, in my experience, founders or owners completely underestimate the sheer amount of information that's needed by buyers, and for very good reasons. And, as you say, very often the forecasting is based on finger in the air, what we've done in the past, rather than actually numbers in the pipeline and conversion rates and, as you say, client by client breakdown. Thank you, jerome. That's been so interesting talking to you. I realize I've taken up more of your time than I thought I would, but it's been an interesting conversation. That's the reason why. So really just to say thanks for your time and I will probably be seeing you soon.
Speaker 2:Absolute pleasure, Joe. Thank you.
Speaker 1:All right Take care, bye-bye.
Speaker 2:Take care, take care mate.
Speaker 1:As ever, thank you for listening to the Consultancy Growth Podcast. This is Professor Joe O'Mahony at JoeO'Mahonycom.
