How buyers of consulting firms will spend their M&A budgets in 2017

Vital research for owners of knowledge-intensive services businesses. (The full report is free to download now here.)

We are pleased to publish our report of the findings from our third annual survey amongst global buyers of knowledge-intensive services businesses. Once again Equiteq has commissioned a third-party, comprehensive survey of the market landscape to deliver current, actionable intelligence that isn’t available from any other source. The report examines the trends impacting businesses in each of our five outsourcing segments: Management consulting, IT consulting, Media & Marketing, Engineering consulting and Human Resources. For the first time, we have also included into our survey the responses of Private Equity (PE) buyers that invest into the industry.

Our research suggests that demand for acquisitions remains very strong, yet there appears to be a reduction in the growth in new acquisition opportunities coming to market.

Market dynamics supporting robust valuations

Note: Figures in the graphic relate to average responses to an array of questions relating to future acquisition activity across all surveyed strategic buyers.

The findings of our survey suggest that although there is robust acquisition demand across all buyer groups, Media buyers have the strongest expectations for future acquisition activity and IT consulting buyers have the largest budgets for acquisitions. Almost half of the Engineering consulting buyers we surveyed said that they were seeing more opportunities than last year, a higher proportion than any other buyer group. Within our report, we discuss some of the industry trends that may be driving these results in our deep-dives covering: Management consulting, IT consulting, Media & Marketing, Engineering consulting and Human Resources.

Breakdown of acquisition activity by buyer group

Note: Figures in the table relate to average responses to an array of questions relating to future acquisition activity for each strategic buyer group.

The results of our survey show a clear convergence trend in adjacent segments of the knowledge outsourcing world. This means that while most strategic buyers prioritized expanding their existing capabilities, all respondents indicated an appetite to acquire outside of their core segment. Our report analyses three convergence trends that we observed, which is changing some consulting segment boundaries:

1.   Media, IT and Management consulting respondents demonstrate interest in each other’s segments;

2.   Engineering and IT consulting buyers are demanding capabilities within each other’s segments; and

3.   Human resources consulting buyers are interested in acquiring traditional Management consulting capabilities.

Consulting segment convergence 

In addition to specific consulting services, we also consider some of the regions and underlying client sector verticals that certain buyer groups are focused on. Our report also reviews the key quantitative and qualitative characteristics that are important to a buyer when evaluating a consulting acquisition. This includes a detailed review of the various types of intellectual property that are considered of importance. This year, our report also considers some of the specific target KPIs that buyers look for during their evaluation of a consulting opportunity.

Reported Enterprise Value as a multiple of EBITDA on precedent transactions need to be interpreted carefully as they usually relate to historic unadjusted profits. This year’s report therefore includes an exclusive analysis of the EBITDA multiples that buyers are telling us that they use to value a seller’s consulting business.

Average targeted current year Enterprise Value / EBITDA multiples by buyer group

Note: Figures in the table show average results for each buyer group.

Our findings show that PE respondents seek higher average acceptable minimum KPIs, such as growth and margins, on acquisition opportunities. They also place more importance on consulting opportunities that are enhanced by IP, particularly software and revenue generating IP. However, these more elevated investment requirements are reflected in significantly higher average valuation metrics as compared with other buyer groups that we surveyed. We consider these trends impacting financial buyers within the industry further in our exclusive analysis of Private Equity buyers.

Private equity KPI expectations and target valuation metrics

Note: Data reflects average responses. The responses relate to questions on minimum acceptable KPIs required and target valuation metrics for an illustrative consulting investment with EBITDA growing at 10-20% p.a.

Our report includes a review of the deal structures targeted by various buyer groups. The findings suggest that around 45% of consideration is typically offered up-front. Respondents also highlight that an earn-out is considered crucial to retain key people and normally lasts around 3 years.

Average target deal structure for each buyer group

Note: Chart shows average targeted deal structure proportions for each buyer group that we surveyed. 

Finally, we consider the approaches to investment appraisal. Our findings showed  that NPV analysis was preferred amongst strategic buyers, while equity IRR is typically used by PE. Corporate buyers and PE that we surveyed reported very similar IRR targets.

The full report is free to download now here. The results of our research suggests a market dynamic, which supports strong buyer demand and valuations for unique consulting sector acquisition opportunities. The findings of our report also highlight the importance of carefully preparing your business for sale and appropriately positioning it with the right buyer. We’ll be providing further analysis from our report in some of our future articles.

Preparing for and executing a sale is a demanding process that requires a significant time commitment and a wide array of deal process skills. Attempting to do it while running your business and without expert support is usually false economy with high stakes. If you are considering your strategic options, whether they include equity growth or advice on pursuing a potential transaction, we would be happy to discuss your plans. Please get in touch.