Deal Review - Human Capital

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As the UK takes its first steps on the long road to recovery, the work of companies operating in the consultancy services sector is coming to the fore.

Thankfully, Britain and the world economy dodged the bullet of a full-blown depression but the recession was still very deep. Confidence is returning, but with unemployment still high, and taxes rising as government stimulus measures fall away, trading conditions look set to remain difficult for some time. In this climate, UK companies are continuing to keep their processes and practices under constant review as they strive to drive down costs and trade more efficiently. This, in turn, is creating demand for a range of consultancy services.

The businesses operating in the consultancy sector are diverse. They range from recruitment and marketing companies through to IT outsource specialists and management consultancies. But there are common factors. Their role is to enable their clients to reduce costs and trade more effectively, often by outsourcing non-core activities. For the most part they are people based businesses, staffed and managed by experts in their fields.

Increasingly they are attractive buy-out targets and even in the current climate, we are seeing vendors in some sub-sectors achieve a multiple of four to five time revenues when they come to sell.

Consolidation in the sector is limited – not least because there are few cost synergies to be achieved – but there is a lot of interest from strategic buyers seeking to add new service lines to existing portfolios.

Deals in this sector tend to be shaped by the characteristics of the companies themselves. For instance, most consultancies are engaged in project-type work, often with a few large clients. This makes it difficult to project profits over the medium and long-term. Beyond the visible pipeline, no one can really say whether today’s lucrative contracts will be replaced by others in the future.

Then there is the human factor. It’s often said of these businesses that their main assets – their people – walk out the door every evening. Hopefully they return the next day, but that’s not guaranteed. The departure of key staff could inflict severe damage.

For these reasons, vendors should expect an element of consideration to be deferred or staged with the final amount payable linked to agreed targets. It is, therefore, hugely important that the seller secures a deal with the ‘right’ buyer – one who will create a working environment that will allow the consultancy to fulfil its potential and achieve the desired performance goals.

Baker Tilly has considerable experience working on transactions in the consultancy services sector. We understand that founders have put their all into creating successful companies. Equally, we know the importance of finding those businesses a new home where they can thrive. Every business in this sector is unique and we will seek to craft a bespoke solution for each client we take on.

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