The most attractive IP-rich service businesses which we encounter during our M&A advisory work have a compelling growth story underpinned by data. They have often reached an interesting inflection point from which they have developed some proprietary IP, are looking to extend beyond being a solely service-based business, and have an established team in the right roles to deliver on this plan.

If not handled in the right manner, however, shareholders may not be fully maximising value across these three core areas.

A growth story where the data falls short

Despite the numerous tools available to support businesses with collating and analysing their data, many businesses do not utilise this to their advantage. This can be because they don’t know the specific data trends or performance metrics to tell the best story. A persuasive narrative for any buyer or investor should be underpinned by clear data. Whether this is revenue or profitability by project, client, or sector, or data around the sales cycle length and conversion metrics by sales individual or service line, a compelling data-driven sales and delivery proposition can make a huge difference to exit outcomes. However, it is important to remember that it should be leveraged appropriately and analysed in advance. This goes beyond pure numbers, and it gives buyers great confidence in the quality of the underlying business, and the management team delivering the strategy. Conversely, poor data can erode trust relatively quickly, leading to greater scrutiny and ultimately lowering the appeal as an acquisition opportunity.

Unrealised value in newly developed IP

Many businesses reach an inflection point, extending beyond service-based revenue streams into IP or product development and launches, which can generate increased value in the business through the lens of an exit. Product-based revenue streams have an improved revenue profile and cashflow predictability, which can work to smooth sometimes lumpier project/service-based revenue, in addition to the value sitting in the IP itself, depending on how differentiated and protected it is.

If this IP is still in its relative infancy (for example, within a year since launch), the value is often not sufficiently realised at the point of marketing the business for sale, for that value to be captured and offered in upfront consideration. Instead, the buyer/ investor may focus more on the cash burn from investing in the IP as a negative point, reducing the quality and increasing the risk profile of the business in their mind. Depending on the people and strategy in place, evolving a service business to a product business is not always a straightforward or linear journey. The business should build in sufficient time ahead of an exit to allow for a clear, evidenced track record of this new strategy succeeding with demonstrable return on investment, if the desired uptick in value is to be achieved.

Human capital missteps: Are the right people in place?

Going through an exit process is a pivotal moment for any business, particularly in service, people-led companies. One key consideration purely related to succession – if current shareholders are looking to exit the business soon after a sale, they need to make sure that for the 12-18 months prior to a sale, the business does not have a strong dependency on them. Too often this does not happen until much closer to the transaction, and after limited questions during the marketing phase or commercial due diligence, it becomes quite clear that client relationships are still primarily held by some of the founding shareholders. Another people-related consideration is whether the right mix of people are leading the business in its next phase. For example, if the company is shifting towards a more product-based business (or at the very least diversifying its revenue streams), then is the current management team appropriate for this? In addition, if the business is seeking private equity investment, is the current management team aligned with the likely expectations the PE firm will look for: CFO in place, consideration of a chair/non-executive, etc.?

Getting the right people is a challenging component of a business’s growth journey, and in the current climate can be extremely expensive (in multiple ways) if the right fit is not found. That said, when a people-based service business has mapped out and executed an organisational structure with individuals who are matched with the next phase of the business journey, it can be extremely value-accretive.

Conclusion

These three areas can be easily leveraged to businesses’ advantage to maximise value on an exit, both in terms of attracting more, credible buyers, as well as improving the offer terms from the pool of buyers. This can be achieved through careful planning, targeted action, and speaking with an advisor to understand how this specifically may apply to the unique business within its buyer and investor landscape.