Consulting agencies have long played a crucial role in driving business effectiveness and efficiency in the United States. As the consulting industry continues to evolve, entrepreneurs who can adapt to the changing economic landscape will find ample opportunities for growth and success.
In today’s business environment, hiring and managing fully remote teams have become increasingly complex, leading US companies to seek reliable staffing solutions. This rising demand has made consulting agencies valuable investments for private equity firms.
If you are considering selling your consulting agency and want to maximize its value, Raincatcher is here to assist you. As a leading industry player in mergers and acquisitions (M&A), we have been recognized as the #1 business broker by Inc. magazine. Selling a consulting business is a significant undertaking that requires time and dedicated effort to attract the right buyers. At Raincatcher, we understand that each consulting agency is unique, and there is no one-size-fits-all approach to the selling process. We tailor our strategy to suit the specific needs of our clients, ensuring the most favorable outcome. This article will outline the comprehensive process of selling your consulting agency, from document gathering to finalizing the deal.
Process of Selling a Consulting Business (at a glance)
If you have decided to sell all (or part) of your consulting business, here is a glimpse at what the process will entail over the coming year:
- Build a strong deal team. Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing manufacturing companies. Find a proven M&A attorney (we can introduce you to a number of groups that we’ve had success with), and a tax attorney.
- Compile your materials. Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financials statements, organization charts, supplier and customer contracts, employment agreements, etc.
- Market the deal. We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
- Receive IOIs. Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings ahead of receiving an LOI.
- Management Meetings. Should it be a fit for your business, you broker will join you in hosting investors for a week to share additional information about your manufacturing company.
- Receive LOIs. ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
- Sign an Exclusive LOI. After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing and plans for the company.
- Due Diligence. Another 60-90 day due diligence window commences with the buyer and their advisors diligencing every inch of your company.
- Close. Closing time. The deal is done and you’ll typically get 80% – 90% of the payment for your business at this time.
- Transition. After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.
Hear From Previous Clients Who Sold Their Businesses With Raincatcher
What Determines the Valuation of a Consulting Business?
Lower middle market consulting companies (sub $15m EBITDA) trade across a fairly large range depending on how desirable they are. A consulting firm that trades for a high multiple (~10x) has many of these traits:
- Revenue and Profitability: Potential buyers or investors will closely scrutinize a consulting firm’s revenue streams, profit margins, and overall profitability. A consistently high and diversified revenue stream and healthy profit margins will significantly enhance the business’s valuation.
- Client Base and Retention: A robust and diverse client portfolio and long-term client relationships add significant value. A loyal client base indicates the firm’s reputation and trustworthiness.
- Industry Reputation and Brand Recognition: A reputable consulting firm is likelier to command higher prices and attract a broader pool of potential buyers or investors.
- Specialization and Niche Expertise: Demonstrating a unique skill set and the ability to solve complex problems within a specific domain makes the business more attractive to potential stakeholders.
- Intellectual Property and Proprietary Assets: Intellectual property, such as patents, trademarks, copyrights, and proprietary methodologies, can significantly enhance a consulting business’s valuation. These assets demonstrate the firm’s competitiveness and can offer a competitive advantage in the market.
- Growth Potential and Market Opportunities: The growth prospects of a consulting business and its ability to tap into new market opportunities are key valuation drivers. Investors and buyers seek companies with a promising future as they anticipate a return on their investment.
- Operational Efficiency and Scalability: Consulting firms with streamlined processes and well-defined scalability plans are perceived as less risky and more valuable.
- Team and Talent: A talented and experienced team is an invaluable asset, capable of attracting clients and driving the firm’s success.
- Client Contracts and Long-Term Engagements: Long-term client contracts and engagements provide stability and predictability to the consulting business. These commitments demonstrate the company’s reliability and can contribute to a higher valuation.
- Economic Conditions and Industry Trends: External factors, such as the overall economic conditions and industry trends, can influence the valuation of a consulting business. An industry experiencing growth and favorable market conditions may lead to a higher valuation.
The fewer of these your Consulting company meets, the lower the multiple will be. While rare in the industry, it’s true that some Consulting companies may not sell at all. However, these are usually small companies (earning less than $500k ARR) with a product that lacks differentiation from other providers, resulting in a high churn rate.
As discussed above and illustrated in this chart, the business valuation of a consulting business can range greatly. Below, we’ll dig into some of the more critical factors determining manufacturing company valuations.
More Consulting Resources
Your consulting business’s historical and projected financial performance is a significant factor in its valuation. Interested buyers need to be able to look through updated accounting records, tax returns, and financial statements and records for factors such as revenue, profitability, cash flow, and growth trends to evaluate the business’s financial health and potential returns on investment.
Generally speaking, the larger a business is, the higher valuation it will go for. A company that generates $500k in annual profit may trade at half the valuation multiple that a like business generating $3m in cash flow trades at.
Additionally, investment groups like to see a margin above 20%. High-margin consulting companies indicate the business as differentiated from their competitors.
Industry Segment and Market Conditions
The industry and market conditions in which the consulting business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, barriers to entry, and industry growth potential impact the business’s perceived value.
Generally speaking, the more niche an industry is, its total addressable market is smaller. However, they likely have few competitors in that niche and can therefore have more repeat business and more durable earnings. Investors will have different views on niche markets, with most buyers liking them but others disliking them for their limited growth prospects.
Buyers assess the growth potential of the consulting business to determine its value. Factors such as product diversification, expansion opportunities, market penetration, innovation capabilities, and customer base contribute to assessing future growth prospects and impact on business valuation.
Even the niche consulting business we discussed in the above paragraph may have strong growth prospects if there is an adjacent market they can move into and a product that they can produce.
Assets and Intellectual Property
The tangible and intangible assets of the consulting business can also impact the company’s valuation. This includes intellectual property (IP) related to consulting methodologies, branding and trademarks, client databases, client reports and deliverables, training materials and workshops, software and tools, contracts and agreements, website and online content, domain names, and human capital.
Well-maintained assets and valuable intellectual property can enhance the business’s value and will trade at higher multiples than those with more commoditized products.
Additionally, companies with strong teams where employees have worked for many years are seen as more desirable and able to transfer leadership to a new owner. While this asset doesn’t go on the balance sheet, employees are critical to the business.
The strength and stability of customer relationships and the diversity of the customer base are considered in the valuation process. A broad and loyal customer base, long-term contracts, and recurring revenue streams can positively impact the perceived value of the business.
What is the Process of Selling a Consulting Business?
While it may not fit all clients, most entrepreneurs we work with who run consulting companies will see the most competitive price and terms for their business coming from a well-run auction process.
Auction processes typically take 7-9 months to complete. On certain occasions, we may recommend that our client hire an accounting firm to complete a quality earnings analysis before we start the auction process. In our experience, this cost and time are justified and can manifest in 5% – 15% hire exit values.
We’ll go into each of the steps of an auction process at a high level below:
How we Maximize Exit Proceeds for our Consulting Clients with our Auction Process
Sell-side due diligence
Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market.
Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.
Specially designed brokerage or M&A auction process
Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation.
Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.
It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.
Negotiate LOI terms and facilitate diligence
Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.
It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.
Talk to the experts
Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.
What Affects the Market's Appetite for the Consulting Industry?
Companies with an evergreen demand for their product/service and recurring customers or re-occurring clientele are nearly always in high demand for acquisition from investors such as private equity firms, strategic buyers and search funds.
Generally speaking, the overall economic health of a region plays a significant role in the demand for consulting services. During economic expansions, businesses may seek to invest in growth strategies and efficiency improvements, leading to increased demand for consulting services.
Thinking About Selling?
If you are entertaining selling your company, feel free to request a consultation with one of our consulting business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.
What Role Does Technology Play in Investors Analysis of the Consulting Industry?
Strategic buyers and private equity groups are interested in buying companies at a discount to the cash flow they can take out of them over the coming decade. There are a few ways they go about this:
- Invest in companies that can grow significantly.
- Acquire highly differentiated companies and therefore have a very stable, predictable client base and cash flow.
In both cases, having advanced data analytics tools and machine learning algorithms to generate valuable insights and identify trends enables investors to evaluate a consulting firm’s performance, market positioning, and potential growth opportunities more effectively. Either this technology will be leveraged to grow the business. Or, it is seen as a differentiating factor to separate from the competition and create a higher margin and more durable revenue stream.
Request a Consultation
At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.
Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented manufacturing companies. This is one of the reasons we are seen as an expert in the manufacturing space.
request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling manufacturing companies.