It would appear that ‘being a consolidator’ is officially the hardest game in the world. Or financial services, at least.
The word itself – consolidator – is pretty vague. You could be forgiven for thinking, an acquisitive advisory business becomes a consolidator on the back of a bombastic press release.
Some are quietly successful, some fail spectacularly. The business models are diverse and all have bombed at some point. How would you pick a winner if you were a seller?
In simple terms, selling your business is about transferring risk. Keep that in mind and
you will keep on the right tracks. Too many models just do not transfer enough financial risk to the buyer.
This is the financial risk of delivering future profits. If a business is prepared to pay you what you reasonably believe to be the next six years’ profits for your business in one lump sum, then you would probably have a good hard think about it. What about four years, or eight years? Typical earn-out periods are over two or three years but if the valuation is good, the earn-out looks fair, and the cash is ready and waiting, you, my friend, have yourself a deal.
What’s the snag? Here’s a few things to watch out for:
- Running out of cash. The deal might be generous, but if the consolidator runs out of cash part way through payments, you might be left high and dry. Some consolidators are financed through debt rather than their own money, and debt can be called in. If it is private equity funded and the private equity firm is gradually taking more equity, the consolidator is probably well behind plan, and giving up cheap equity for cash. Once that stops and other investors are sought, they might have written it off. Ask for details.
- Impossible earn outs. I have seen unachievable earn-outs agreed, because the seller hasn’t read the detail. Example: a requirement to include a notional salary for directors’ remuneration in the profit calculations, instead of taking dividends. This might seem a cute move by the consolidator, but a demotivated workforce is not really healthy for anyone.
- Roll up deals. Never say never but as a general rule I don’t like these deals. Swap all the equity in your business for a tiny bit of equity in our business and we’ll use our scale to save you money and sell for billions. The seller gets £0 and a few shares in a business which it has no control over and is statistically more likely go bust. Some of the businesses offering these deals have been rescued from the brink several times already. Look at the full corporate history, and ask around. You have been warned.
Too many consolidators have no real cash at all, and what they do have is stripped out by the management team as salary. The sums of money mentioned in press releases are often works of fiction, paper valuations which are entirely aspirational. Some advisers haven’t had a single penny paid to them, from roll-up deals in particular, after years of waiting.
In contrast, there are plenty of advisory businesses, and some decent larger institutions who’ve done it well, with the minimum of fuss, and left everyone feeling warm and fuzzy long after the deal was done. They don’t always get the headlines. They don’t tend to need them
Phil Young is managing director at Threesixty