This blog series deals with growing a Professional Services (PS) business through acquisition. It will specifically walk you through how to use acquisitions to expand your portfolio of offers and/or get to critical mass in a multi-offer PS business. This blog does not discuss using acquisitions to merely obtain staff to increase the size of a product-attached implementation business. That said, most PS businesses that launch as product-attached want to expand their offerings and move to outcome-based. This blog will explain how to do so through making the right PS acquisitions.
As we all know, PS is a unique business that works differently than other businesses in a large company. The PS business requires different structures, rules of operation, talent management, etc. Acquisitions are no exception – acquiring companies works differently with PS than it does with other businesses.
When acquiring a company, we are trying to increase the portfolio to allow the PS business to make a greater impact on the customer and the overall business. This requires offers that solve more important business problems than product-attached businesses can do in isolation.
Most acquisition groups in your company believe in larger acquisitions because the cost of the acquisition is similar for large and small deals. However, what you need usually isn’t size – it’s IP and a little know-how. There are few large PS businesses that will address your needs. Two exceptions to this rule were IBM’s acquisition of Price Waterhouse consulting and Korn Ferry’s purchase of the Hay Group. In both cases these were well-managed and disciplined firms that met their growth and strategic requirements. In most cases, however, this type of large acquisition is not an option.
The normal PS opportunity is to acquire a small or mid-size firm that works in the area you want to get in to. When evaluating these opportunities, there are a few things you will have to understand or accept:
- The target firms will not necessarily be managed well. That does not mean they are not successful in their space – it means they were likely created by an innovative person and built around an idea or two. What you want is their IP and a few people who know how to sell and implement the idea. They most likely will not have experienced how to work in a multi-offer business or pull through the rest of your company’s products or offers. Therefore, size works in an inverse relationship. Why buy more than you need? The uniqueness of the IP matters most.
- It’s important to develop that methods and processes you want the acquisition to adopt. This includes:
- Offer structure – Tighten and restructure their offers so that they’re more repeatable and less dependent upon the founder(s)
- Selling – Understand how the sales assets will be enabled to sell this more impactful offer and how the talent from the acquisition will participate in that process
- Portfolio – Have a clear position on how this offer fits into the larger portfolio of the PS business and the broader company
- Talent Strategy – As the acquisition grows, define where the talent will come from and how are they going to be trained on PS and this offer
Therefore, it’s best to find a small PS business that fulfills your needs with very differentiated IP. While this is the ideal situation, there are other criteria to consider:
- Principal’s Intent to Sell: First, it is best to acquire a firm where the principal has a reason to sell. For example, she/he wants to find a way to retire over time or is tired of running a small firm.
- Payment Structure: Second, small PS businesses are rarely worth what the selling needs to accomplish their financial goals. We have participated in roughly 100 of these acquisitions, and we believe the best practice approach is to provide them a payment up front and then tie a significant amount to your joint ability to grow the business. This two-stage payment structure will allow them (if they believe in you) to sell the business and have an opportunity reach their goals while you have their IP and some related talent.
Simplified Example: Illustrative
2 million annual revenue firm
Pay 1 million at closing
At 5 million in revenue (and related gross contribution) pay 1 million
At 10 million in revenue (and related gross contribution) pay 2 million
At 15 million in revenue (and related gross contribution) pay 3 million
They receive 7 million
Let’s assume this occurred over 3 years
You would have received 22 million in revenue
And 55% (gross contribution from projects) of 22 million – 12.1 Million in gross contribution
Also, if you have purchased solid IP and placed them into a strong system, (applying the methods and processes described above) then you would have also been able to acquire new accounts and have significant pull-through of other PS projects and products. In following blogs, we will discuss how to manage an acquisition strategy for several acquisitions.
Written by: Dean McMann
About the Author: Dean McMann is a Founding Partner at McMann & Ransford with 35+ years of experience in consulting and professional services. He is a sought-after expert and speaker on topics of: B2B differentiation, professional services best practices, and overcoming commoditization. In addition to his extensive experience in the Professional Services space, Dean also serves on the board of various non-profit organizations.