Accounting for 74% of all UK buyout deal flow by number of transactions in Q3 of 2022, the buy-and-build approach has become the most widely adopted investment strategy employed by private equity firms. The strategy entails systematically acquiring and integrating multiple entities over time to expand reach, capabilities, and market share. Rather than depending solely on organic growth, the goal is to construct a larger, more diversified organisation through strategic acquisitions.
QuantSpark recently assisted a professional services group in preparing for an exit from a buy-and-build investment strategy. The group offers diverse services from Corporate and Private Client Tax to People and HR functions. Their strategy focused on acquiring smaller entities, establishing new geographic hubs to diversify service offerings. This created synergies and cross-sell opportunities by leveraging the combined capabilities of the acquired entities, while also benefiting from economies of scale through cost efficiencies.
A crucial element of a successful buy-and-build strategy is the seamless integration of acquired entities. Transitioning from a collection of disconnected entities, each using disparate systems and data storage, to a unified organisation is inherently complex.
To prepare for a successful exit, robust historic revenue reporting across all business units and entities is essential. In preparation, our client orchestrated a system migration to unite practice management mechanisms and data storage for all historic entities and business units on a single platform.
QuantSpark facilitated this system migration by developing standardised policies outlining fee management and revenue recognition practices to be adopted by the business units. Ensuring that all entities operate under a consistent framework, a framework that can then be used to map historic revenue from disparate entities to provide a united group-level view of revenue for the past 2 years that seamlessly integrates with the future state design.
The standardised policies developed by QuantSpark encompass three components: Revenue Recognition, WIP (Work-in-Progress) Management, and Fee Structure and Practices. Each component is designed to establish clear guidelines and practices that unify service lines within business units.
Revenue recognition determines how and when revenue is recorded and reported. QuantSpark established clear guidelines to ensure consistent and accurate revenue reporting across all business units and entities. This involved defining specific criteria for recognising revenue, such as the completion of service delivery or the achievement of certain milestones.
In professional services companies, time writing is a common practice across the majority of business units. Given this, the most appropriate revenue recognition policy is structured around “Good Production” which refers to the measure of productive and billable work completed within a month, calculated to reflect the actual economic value generated by the firm's activities. This method, therefore, aligns revenue recognition with the productive hours worked by employees, ensuring that revenue is accurately attributed to the services provided during a specific period.
A Work-In-Progress (WIP) management policy is another essential component in the creation of standardised policies. Such a policy establishes a structured approach for tracking, reviewing, and provisioning WIP, which includes all partially completed work that has not yet been billed. The policy contains guidelines for time recording, monthly WIP reviews, recoveries and inputs estimation, provisioning for doubtful WIP, and procedures for writing off unrecoverable WIP.
By implementing this policy, firms can ensure consistent and transparent handling of WIP, enabling accurate revenue recognition and improving cash flow management. This policy unites business units into one common practice, providing a clear framework for financial audits and due diligence, ensuring that all WIP is accounted for and aligned with the firm's financial goals and reporting standards.
The fee structure and practices component of the standardised policies delineates the billing structure, fee methods, and specific milestones for fee raising within a Business Unit. Each business unit groups its service lines under common fee structures, ensuring consistency and simplicity in operations.
For example, for all Audit service lines, the fee is pre-agreed and billed at two key milestones: 70% upon completion of planning and fieldwork, and the remaining 30% upon final completion. Billing is triggered by the completion of these project milestones, with clear payment obligations specified.
This streamlined approach, applied consistently across business units, covers numerous service lines with a limited number of policies. Standardisation simplifies operations and ensures uniform fee processing across different entities, enhancing financial predictability and operational efficiency.
QuantSpark reduced the number of revenue policies to an average of four per Business Unit, with only two different methods of billing and revenue recognition criteria used, drastically simplifying the financial management and reporting processes across the organisation.
Standardising the policies established a robust framework for data capture moving forward, serving as a benchmark for aligning historical revenue data and creating a seamless revenue stream. This significantly enhances the due diligence process, providing potential buyers with clear, comprehensive financial data and facilitating smoother transactions.
Having a seamless revenue stream for the past three years significantly enhances the due diligence process before an exit. Potential buyers benefit from clear, comprehensive financial data that reflects the company's performance, reducing uncertainty and facilitating a smoother transaction process.
The adoption of these policies also improved operational efficiency, financial transparency, and cash flow management. Consistent practices across all business units ensured accurate financial reporting and timely billing, supporting financial stability and robust financial governance.