I should begin this post by pointing out that I am not questioning the value of advice provided by sustainability consultancies.
There are many good outfits in the field. Just as there are quite a few one man/woman bands, and larger firms doing anything from excellent work to basic PR.
What I am wondering about, however, is how much value sustainability consultancies accrue for their founders and owners.
A good friend of mine, who has looked into these things, told me he thought three times net annual earnings*, plus perhaps the cash in the business, was the going rate.
That sounds about right to me. I know conference businesses go traditionally for a multiple of about five, and subscriptions businesses for about eight.
Consultancies**, being all about the people, often the top ones who may want to cash out from a sale, are valued slightly less on an earnings multiple. This is given their lack of actual physical assets that can generate cash beyond the knowledge and contacts of their senior executives. Those folks may not stick around that long for the new owners. That was the view in the past, at least.
Of course, these figures are all based on pre-recession days. Pre-2007/8.
These days things may perhaps have changed. I’m aware that not all sales are based on earnings in many sectors, particularly in software and technology businesses, where the carrot dangled is scale and speed of value creation.
At least one of the London consultancies in the sustainability field that has been sold, was not sold on an earnings basis, I am told.
But that doesn’t mean it went for millions and millions either.
From what I hear, and I know a little (I mean that literally) about a couple of sales of sustainability consultancies in London, no-one individual has sold one and walked away with more than a million pounds. It’s usually much less.
Quite a few outfits (I’m not naming any names in this post you’ll notice) have been around 10,15, even 20 years, but as yet, there’s no sign they are worth much more than the old three times earnings plus cash in the bank valuation of the past.
Equally, no big outfit has built a big practice in the field. There are a few of the big consultancy/professional services fish that claim to have done, but I’m sceptical about their claims. My contacts tell me their 100-200-300 strong ‘teams’ are often/mostly working on projects which have little to do with sustainability consulting (depending, of course, on how you define that!)
Equally, outfits like AccountAbility (formerly a UK research charity, now, oddly, an American-based ‘management consultancy’ which is ‘non-profit’) said they would build, from the ground up, a 300 person CSR consultancy outfit.
That blatantly hasn’t happened.
The PR companies have also failed to build up consultancy practices in the area.
Every year, for about a decade, a new, fatously-named unit has been announced, only to be re-absorbed into the corporate or financial PR machine it came from usually within a couple of years.
So where are we? We’re working in a field where some people run 20-30 person large (ish) boutique, lifestyle business consultancies. Whilst some of these do good work, they appear to be of limited value in the market-place. That’s not to say their owners cannot do well: Some of them can bank more than half a million a year in net profit. Not bad at all, even if they can’t be scaled to be sold for millions.
Given the inability of mainstream business, from investors to procurement, to understand what sustainable business means in practice when embedded, perhaps all this is no great surprise to any of us.
I don’t mean to end on a negative note here. It’s perhaps helpful that sustainability consultancies stay as boutiques. The quality of their advice may well become diluted were it to be otherwise.
*I should clarify that when I wrote ‘earnings’ I meant annual net profits. Whether that is EBITDA or actual ‘net net’ may depend on the deal itself.
**Secondly, @i_futures on twitter asked if I meant to include engineering consultancies in my analysis. A good point. Definitely not, given that ERM has been sold and re-sold/bought out for increasingly large sums of money in recent years. Engineering type consultancies are very much bigger, often have longer-term contracts, and a altogether a very different kettle of fish. I was referring mainly to the boutique-type consultancies of 5-30 people very common in the field of corporate responsibility/sustainability.