How to make your business an attractive target to be acquired by the big end of town

The professional services giants went on a buying spree last year, with business after business acquired.

Collectively, the Big 4 accounting firms (Deloitte, EY, KPMG, PwC) and large consultancies (Accenture, Bain, Capgemini) acquired over 20 professional services companies in Australia in 2021, as they seek to reinvent themselves beyond their traditional service offering.

That process of re-engineering can be seen in diverse transactions — ranging from Deloitte’s acquisition of PDS Group, a property development and project specialist, to KPMG’s acquisition of Oracle cloud services consultancy Certus APAC.

The process has also been driven by the well-documented “war for talent”, coupled with aggressive growth agendas at these firms and clients who are demanding niche, value added capabilities.

With these trends only showing signs of growth, there will be continued demand for small and medium sized professional services business with the expertise and specialist skills that bigger consultancies can add to their stable.

So if merging your professional services business with one of the Big 4 or large consulting firms is potentially appealing to you, what should you be doing to make your business an attractive target?

The five areas that should be directing your focus

1. Culture

   Many professional services businesses that want to be acquired overlook the truth of ‘culture is king.

   A firm with a strong culture offers value in the form of a cohesive team, strong morale, and high retention and attraction rates.

   A firm with a poor culture might have rock star advisors or a useful service but lacks the intangible bonds to leverage these assets.

   The big players always consider culture when assessing transaction targets so as a firm, being able to both articulate your culture and demonstrate your culture in action are both vitally important.

   The increased focus on corporate culture and its links to environmental, social and governance (ESG) factors is also critical — and a poor record on ESG is also a deal breaker.

   Remember that cultural compatibility is a two-way street. If you decide to sell your business to a large competitor, then it is highly likely you will join that competitor as a partner/director (this is usually a key condition of the transaction). It’s important that there is clear alignment with you and your team.

2. Services

   The large firms are generally less interested in what we would call “bulk-ups” (where they already have existing capability and simply want to add heads).

   This might be the case for a big firm buying a small audit practice to add to its existing large audit practice, for example. Instead, many want something they don’t currently possess, so companies providing specialist, niche and en vogue advisory services (think cyber, analytics and AI, digital transformation, Web3 as examples) are attractive targets.

   Companies with diversified revenue streams, where the top line isn’t driven exclusively by “time and materials” engagements, are also generally more appealing.

3. Clients

   Having a diversified client portfolio is important for a couple of reasons. The most obvious is that reliance on a single customer for a large percentage of overall revenue is generally a turn-off for acquirers.

   Additionally, the Big 4 all have large audit divisions which means they are often conflicted out of providing non-audit services to certain clients. A mix of corporate and government clients is also highly desirable in most cases, as this mirrors the client portfolio of acquirers.

4. Scale

   Most of the large players will start to get interested where a target company has 20+ employees and/or revenue of $5 million-plus.

   That said, they have all done smaller deals, particularly where the target has an interesting technology angle — imagine a killer piece of software or sticky managed service offering.

   All of the large players have significant centralised infrastructure (IT, finance, HR, legal etc.) so it’s often a good time to consider a transaction when you’re starting to think about building out this infrastructure for yourself.

5. Profitability

   The final area you must consider is profitability, and how you can demonstrate that to a bidder.

   Traditional measures here, such as EBITDA or EBIT, are usually not that relevant to a major bidder as your existing cost structure is likely to be very different from the cost structure of the potential acquirers.

   Instead, they will focus more on revenue and gross margin (GM). In a traditional consultancy that calculation is simply the difference between total revenue and client facing staff costs divided by total revenue.

   GMs of 45-65% are commonplace at the top end of town (and required to service large operating cost bases), although target company GMs are more often running at 20-40%.

   Being able to calculate your GM and demonstrate how you can collectively improve this in the future is important.

What’s the lesson for a smaller professional services firm looking to sell?

Think about what makes you attractive not only at the bottom line, but as a place to work, somewhere with a broad and varied client book, and with the scale, services and profitable record that would appeal to a buyer.

Tick those boxes and you are much more likely to be able to do the deal.