Dependence: as much a friend as a foe

written by
Ellen Darbyshire
Jul 10, 2023
minutes read

As the leader of a consultancy, you’ll likely be running your firm with the idea of optimizing your shareholder value and exit prospects in mind.

Alex Thomson, Partner for Growth Capital Partners, a private equity investor, and Jerome Glynn-Smith, MD for Equiteq, a specialized M&A advisor to the consulting industry, discuss the downsides—and surprising upsides—to dependence, and how these play into private equity deals, in our latest partner webinar.

The flipside of dependence

“Dependence is everywhere,” says Jerome. “It’s something that needs to be positioned right, but it often has a lot of positives too.”

Growing consultancies with a strategy focused on larger, MNC clients often find themselves getting concentrated into the relevant accounts they’re trying to service. But while this may ring alarm bells as an investment risk, Jerome says there’s also a flipside.

“There’s value in having meaningful relationships,” he said. “Having engagements with a few £500,000+ clients rather than a lot of £10,000 relationships signals there’s substance to those engagements.”

These relationships ultimately demonstrate credibility of your consultancy’s value proposition, as well as its growth plan and equity story.  

Similarly, there’s also value in being niche. “A £10-30 million consultancy is a smaller company in the global scheme of things, but this means you can be very knowledgeable in one particular niche. That’s what makes you valuable.”  

Your niche might be a specific sector, perhaps, or a horizontal capability. As a result, your business has a level of credibility and a segmental track record that could be much more impressive than that of a larger consultancy—who, in turn, will find your business attractive.

“Dependency isn’t necessarily a value drag,” agrees Alex. For him, the key thing is to be able to recognize where the dependency is within the business – and then clearly articulating how the business will manage it. If you ensure the strategy around the relationship is thought through and mitigated in terms of risk, dependency doesn’t need to be negative.

“If you can make a virtue of having a concentration with a specific client, whilst also having mitigants within your solutions that allow you to re-deploy people, that’s a really strong position to be in,” Alex says.

Being clear about why you’re exposing the business in a particular way is critical to demonstrating value, even if something is, on the face of it, potentially problematic.

Challenges for founders

One of the most challenging situations that founders and owners face when going through a private equity deal is saying you want to do something … that you’re not actually committed to—perhaps to get the deal done.  

Alex observes that the individuals who had previously been eager and supportive of the next growth stage often would have preferred to cash out or step back at the point of the deal.

“This scenario is difficult to manage because you’re founding your relationship on creating and sharing value,” says Alex. “If the people you’re resting your business on decide they’re not up for supporting your journey, that’s a problem.”

This problem often arises when people think they need to tell investors like Alex what they want to hear. Yet there’s no shame in being open and honest about what you want to achieve from a transaction upfront as there’s no right or wrong answers.

“And this is where Jerome and his team can really help—they can help shape the right solution for a deal and avoid potentially ended up with a misaligned investment partner.”

It’s also important to note that consultancies are rarely owned by one person—it’s often two, three, or even more within partnership situations—and so it’s crucial to make sure everyone’s aligned.

“Before engaging in any form of private equity investment or M&A, know the objectives and ensure there’s alignment,” says Jerome. Misalignment can be a serious hindrance if not managed early, and so it isn’t something you want to find out about during a deal.

On the flipside of this again, a private equity deal can be a great way of resolving different ambitions for founders. “It’s a good way to reconcile all of those potentially contradictory aspirations,” said Alex.

So, while alignment is definitely important, it doesn’t necessarily mean everyone’s ambitions in the deal have to be uniform—different ambitions can be accommodated.

To hear more from the discussion, watch the full webinar here.

Learn more about Equiteq and Growth Capital Partners.

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