There are very few acquirers looking to buy a consulting firm.
Consulting businesses are typically a very unattractive business to buy and if they do sell, the multiples are tiny*.
* Yes, there are exceptions to every rule and there is always an equal and opposite point of view, so please email me (alex at productize dot co) if your consulting business fetched north of 2 x annual revenue when you sold it.
I asked my pal and M&A expert, Ryan Tansom to weigh in here:
“If you own a consulting company that relies mainly on you for the marketing and delivery of its services, regardless of your topline revenue, then you only have a job.
A high risk and stressful one.
A sellable business is a machine that kicks out cash whether or not you are working in it. A financial buyer looks at a business like an asset. They’ll ask; “what is my cash on cash, rate of return and what kind of risk comes with it?” A financial buyer does not want a job and to go work in a company.
They want a stream of cash flow and an asset that increases in value, WITHOUT working in it.”
Ryan helps founders sell their companies for a living, so I’m on board with his point of view.
With that idea in our back pocket, let’s get into the post.
To learn why the market is so thin, let’s look at the purchase of a consulting business through the eyes of a financial buyer.
Buyer’s Due Diligence Questions
As a stodgy financial buyer, looking for a quick ROI, here are some (of the many) questions I would want good answers to:
- How much of the business relies on the owner’s execution?
- Sales? 0 – 100%
- Marketing? 0 – 100%
- Operations? 0 – 100%
- If the owner were to leave tomorrow, would the business lose customers because of their personal involvement in the client relationship? If yes, how many? 0 – 100%
- What percentage of new business is won because of a personal connection between the owner and clients? 0 – 100%
- Does the business hold any intellectual property?
- Does the business have any proprietary processes?
- How much of the revenue stack is monthly recurring revenue? 0 – 100%
- How much of the revenue stack is annual or multi-year contracts? 0 – 100%
- What does the business look like at 10x it’s current scale? Does it become more or less profitable?
Maybe if you have good answers to this, you’ll get .5 to 1 x revenue.
Accounting firms typically sell for .75 x annual revenue and they have a recurring book of business.
There are lots more questions that can be used to poke holes in the underlying value of a consulting business, but the ugly truth is this:
Consulting businesses are rarely valuable or scalable enough to sell.
I am not saying there is anything wrong with this.
I am an active consultant and I love the work I do.
I mean, I get paid to help entrepreneurs.
What’s not to love?
There is one thing.
I can’t really sell the relationship I’ve built with Jeremy for money.
A financial buyer doesn’t really care.
Sorry, Jeremy 🙁
But there is an in-between. A happy medium. A middle ground.
If you’re looking for a model that:
- Scales beyond you
- Gives you freedom of time
- Can be sold for a multiple of revenue
… then a productized service might be worth a look.
Here are some recent listings of productized services on FE International.
Even if there is some heavy-duty haggling, you’re still looking at 1.25x to 1.5x in ARR.
Strategic acquisitions of productized services command a much higher multiple.
Now, why is that?
Productized service companies scale.
Let’s reframe our due diligence checklist to help your consulting business go down the same path.
Set Yourself Free Checklist
- If you had the resources, which of the following functions would you hand off to a team or vendor to manage for you and in what order?
- If your client was to have a relationship with a brand, rather than you individually, what would you call it?
- What would the brand promise be?
- What would you do 10x better than your competition?
- How can you build the business to not be dependent on your involvement in the execution of any processes?
- What are the top processes you believe you should be involved in? (Spoiler: it’s mostly a trick question, it’s often stuff that needs approval rather than execution, e.g. payroll, etc)
- What responsibility would you love to rid yourself of?
- What intellectual property could you create to streamline your workflow?
- How could you accelerate your business growth?
- What about systematizing your processes?
- Is there existing intellectual property you could take inspiration from or businesses in adjacent industries you could imitate?
- What steps could you remove from the existing client process to streamline the experience?
- Can you make the process, end to end to figure out what resources you could put in place to fulfill the experience?
- What problem does your customer need to be solved every single month? Can you solve it for them?
- Would your customer be willing to prepay for your service if you offered a fair discount?
- If you got all of the above questions taken care of, what would your org chart look like at 10x your current scale?
Whew! That is a lot of questions to answer, but I’m also steering you towards an entirely different model.
You guessed it.
You might want to consider building a productized service.
Here are a few examples:
Hubspot – done for your Hubspot tasks. 21 team members. Revenue undisclosed. Founded in 2014.
Helpflow – live chat as a service. 200 clients. 4 years in business. Lots of team members on the about page, revenue undisclosed.
Lead Cookie – done for your LinkedIn lead generation. Six months to $33k/month. Well beyond that now, with the founder working five hours a week (!?)
WP Curve – 24/7 WordPress support. Founded in 2013, scaled beyond 7 figures in annual revenue, sold to GoDaddy in 2016. That’s my old business.
There are dozens more success stories.
So what is this productized service thing?
It’s deceptively simple:
- You identify a recurring problem you enjoy solving
- You build an offer
- You map out a process to solve the problem
- You sell it
- As you make progress, you scale a team around the process
You free yourself.
At this point, you might have more questions than answers.
Can it be big enough? Sure. There are plenty of examples of very successful productized services that are well into eight figures of annual revenue, like Main Street Hub. ProfitWell is a tech-enabled service that’s doubling revenue year over year, tracking at $8MM ARR with a 90% services margin. The list goes on.
So, what’s the catch?
You need to nail down the problem you want to solve and get to work.
Here’s a template to help.
It’s called the RESCUE framework and I use it to discern if a productized service is worth building.
Submit your details below and I’ll share the following with you, for free:
- A blank RESCUE template you can use for your own ideas
- Six videos to explain the meaning of each term
- A completed RESCUE template for WP Curve (24/7 WordPress support company I co-founded and later sold to GoDaddy)
- An 8-figure productized service business idea, plus
- An 8-week program to help you make the transition from Consultant to CEO
Here’s a brief preview: