Unpacking the M&A Process for Consulting Firms (6 Stages)

The merger and acquisition (M&A) process can feel like a black box, and for good reasons.

It’s a process you’ll only ever go through once as a consulting firm, hopefully. It’s also a topic you won’t need to address until you have something worth selling, which is generally going to happen later on in your journey. And finally, you often don’t need to understand all the finer points as long as you have assembled a strong M&A team around you.

We have assisted in hundreds of transactions over the years, and most unfold in the same, predictable way. Even though you might not need to understand each and every detail along the way (thanks, lawyers!), it’s still good to have an understanding of what the process looks like so you can prepare yourself and your team. Fortunately, the process has a lot of parallels to a process many business owners are more familiar with: finding a partner.

Here are the general stages and their corollaries:

1. Flirting = Marketing Your Firm For Sale
2. Casual Dating = Initial Conversations
3. Going Steady = Letter of Intent (LOI)
4. Engaged = Due Diligence and Negotiating Purchase Agreement
5. Wedding = Closing
6. Early Marriage = Earn Out Period

We’ll assume that before you start marketing your consulting firm for sale, you’ve already built a firm worth selling and can put your best foot forward. The sale process usually takes a minimum of 6 months, but can take a year or more, depending on multiple factors. Usually the buyer drives the timeline, which can be frustrating for a consulting firm owner used to being in charge. Here’s how it plays out in more detail.

We have assisted in hundreds of transactions over the years, and most unfold in the same, predictable way.

1. Marketing Your Firm For Sale (Flirting)

Usually this is the stage where you would bring in an M&A advisor or broker to help you out, for a few reasons:

1. They know what buyers are looking for and know how to tailor your story to them
2. They have relationships with buyers already
3. This allows you to continue focusing on your business

The only goal of marketing your firm for sale is to drum up enough interest to move to the next stage, where you are having multiple initial conversations.

Truthfully, you don’t really stop marketing your firm for sale until you are contractually obligated to stop (usually via an LOI). Generally, after you’re under a mutual NDA, you would share things like the previous 3 years of P&Ls, your balance sheet, your client roster by percentage, your employees with tenure, salary, and roles, and anything you have on your culture.

2. Initial Conversations (Casual Dating)

Once you’ve gotten some interest, it’s time to go on a few first dates. Usually these are just 45-60 min video calls with your broker or advisor present. Both parties will give an overview of their firms and their goals, and will allow time for each other to ask questions. It really is a lot like a first date.

Afterwards, both parties will regroup and determine if it makes sense to dive deeper. If yes, you would have a few more meetings, talking to other important people on the buyer’s team and learning about their M&A process and expectations. You will be answering a lot of questions at this stage and it can feel like a one-way street, but that’s normal.

3. LOI (Going Steady)

A Letter of Intent (LOI) is a non-binding agreement between parties that gives the buyer a certain amount of time (usually 2-3 months) to conduct more in-depth due diligence without fear of the seller finding a new buyer. This is done via a “no shop clause,” which effectively stops the seller from shopping around.

An LOI isn’t a guarantee of a sale, but it’s a strong indication of interest and will always precede an actual sale. LOI’s are shorter documents than Purchase Agreements, but can still be 10+ pages of legalese, easily.

Most deals for consulting firms will not be all cash upfront, but will include partial payment tied to an earn out period.

4. Due Diligence and Negotiating Purchase Agreement (Engaged)

You will want to make sure all the crucial points are negotiated prior to signing an LOI, since the LOI kicks off the more time-consuming and expensive parts of the process: due diligence and negotiating a purchase agreement. Due diligence is similar to a due diligence period when buying a house. It’s a period of time to do more detailed research and fine tune an offer.

A purchase agreement can go by other names, but the function is the same. It’s the binding contract that both parties sign, transferring ownership from seller to buyer. Expect this stage to be time-consuming in small bursts, in between long periods of anxious waiting. This will likely be the most emotionally draining part of the process – much like my actual engagement with my now wife was.

5. Closing (Wedding)

Some deals never make it out of due diligence, but if you do end up making it to the closing table, prepare to be underwhelmed. There’s a lot of build up to this moment, and it’s usually anticlimactic. Celebrate with a nice dinner, and then roll up your sleeves for the announcements and integration.

But if you’re dating with the intent of marriage, you’ll learn more about yourself the further in the process you get, and the less time you’ll waste once you’ve found that perfect match.

6. Earn Out Period (Early Marriage)

Most deals for consulting firms will not be all cash upfront, but will include partial payment tied to an earn out period. These can range from 1-5 years, with most in the 2-3 year range for consulting firms.

Because consulting work is so tied to the people and the clients, buyers want to make sure that they’ll be able to keep making money before committing tons of cash. Expect to receive 30-50% of the total purchase price in cash upfront. The rest will be contingent on hitting certain milestones. These can vary, but typical ones include:

• Continued employment
• Client retention
• Top-line revenue targets
• EBITDA targets

The earn out period is one reason why it’s good to start thinking about selling before you’re ready – because you’ll likely end up still working for the buyer for a few years even after closing, if you want to maximize your earn out.

If you don’t make it to the signing table, that doesn’t mean you haven’t built a sellable practice. It might mean that the right buyers have their hands tied with other things (organic growth or other acquisitions, for example).

Like relationships, it often takes a few tries to get it right.

But if you’re dating with the intent of marriage, you’ll learn more about yourself the further in the process you get, and the less time you’ll waste once you’ve found that perfect match.

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After after graduating from Emory University’s Goizueta Business School with a major in Marketing and a minor in Religion (there is more overlap than there should be, unfortunately), I started working at a small boutique marketing strategy consultancy, (r)evolution partners.

In 2011, I left to pursue my own business, Monday Night Brewing. Along with two business partners, I have grown our craft brewery to four locations (two in Atlanta, one in Birmingham, and one in Nashville) and 100+ employees. Now, I head up the M&A practice at Punctuation, where I work with David C. Baker, who also happens to be my father.