#21: Exit Strategy

This month I want to talk about exit strategies, which I covered very early on in a previous article but want to return to before the year is up.

I am indebted to my good friend and trusted associate Julian Sawyer, with whom I had a fascinating discussion around exit planning for a consultancy practice. He should know a thing or two, as he has successfully achieved it!

In chatting over a coffee, we started to talk about what you need to do to make a consulting business saleable – is there something more than just a good P&L story and a management team? These hygiene factors clearly need to be there. A buyer will also, if they are smart, de-construct your P&L and re-build it – so there is a false sense of success if they apply market rates for salaries, take out a one off blip from one high earning client and apply attrition factors to the business. So are there other factors? Julian believes so, and they come down to four areas which should be noted to enhance your purchase price:

1. What are you famous for?

Are you a trusted advisor to your clients or do you have a business based around a guru? Either can be a strong business strategy but they are very different in how you manage the business, reward the team and grow the business. The valuation and sale approach will be different (not to mention the lock in criteria!). Being quite good in both of these styles of business at the same time is fundamentally flawed. Purchasers will be looking to extend deeper into clients (selling more services or new services to your clients) or looking to position themselves behind the guru maybe as a technology provider in this space.

2. Who are your clients?

Are they strong stable businesses, are they wide across the industry sectors and diverse? You also need more than one client and certainly more than the mate who has hired you! Preferred Supplier Arrangements, Master Service Contracts and long term, multi-engagement roles show the depth is there and the assurity about stability of income. This depth enables leverage of more consultants or additional products or services, which increases the upside for the purchaser.

3. What are your methodologies and processes?

Having the black box, the repeatable process, is somewhat important (though sometimes over egged by consultancies!). Having a methodology and a set of processes helps a seller in two ways, it shows there is some residual IP in the business and the eternal hope that cheaper, younger resources can be trained and utilised to deliver high value consulting engagements.

4. How much loyalty do your consultants have?

A consultancy where everyone is treated as peers (a group of mates that have come together) is not attractive or at the very least reduces the types of companies interested. Having a single point of failure (i.e. a rainmaker) increases the risk and reduces the overall value (or at least the distribution of the proceeds). The acquirer, again if smart, will realise the owners will move on and they need to ensure the rest of the team doesn’t walk.

Go through these points and ask yourself, do you really know how much your business is worth to others when, in reality, there may be many more people doing exactly the thing as you who can offer them the same deal or services. Will you be able to tell when the time is right to walk away and hand over your responsibilities and obligations to someone else, or will you stay just for the sake of staying?

Something to think about.