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.
These organisations made a conscious decision years ago to reinvent themselves beyond their traditional service offering and the reengineering continues with 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 well documented “war for talent” coupled with aggressive growth agendas at these firms and clients who are demanding niche, value added capabilities in addition to the traditional service offering, means there will be continued demand for small and medium sized professional services business for the foreseeable future.
If merging your professional services business with one of the Big 4 or large consulting firms is potentially appealing to you then there are several key factors to consider in making your business an attractive target.
It is often underestimated by professional services businesses looking to be acquired that “Culture is king”. It may be an overused term but nonetheless it is an extremely relevant phrase that the big players utilise in assessing transaction targets. Being able to 1) articulate your culture and 2) demonstrate your culture in action are both vitally important, particularly in the modern environment where corporate culture and Environmental, Social and Governance (ESG) factors are inextricably linked. 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) so it is important that there is clear alignment with you and your team.
The large firms are generally less interested in pure “bulk-ups”, which is where they have a traditional capability and simply want to add heads (for example, buying a small audit practice to add to their existing large audit practice). Companies that are 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.
A diversified client portfolio is important for a couple of reasons. Firstly, the obvious one, 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.
Most of the large players will start to get interested where a target company has 20+ employees and/or revenue of $5m+. That said, they have all done smaller deals, particularly where the target has an interesting technology angle, for example a killer piece of software or sticky managed service offering. All 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.
Traditional profitability measures (e.g. EBITDA, EBIT) are less relevant as your existing cost structure is likely to be very different from the cost structure of the potential acquirers. The focus is generally more on revenue and gross margin (GM), which in a traditional consultancy is simply: (Total revenue – client facing staff costs) / 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 GM’s 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.