Consulting for equity is a practice that has gained popularity in recent years, but when executed in everyday, established SME’s it can have a huge impact on scaling a business from a small local company into an industry leader
CREDIT: This is an edited version of an article that originally appeared on SME Today
Here are some of the benefits of consulting for equity and how it benefits both the business owner and the consultant.
What is consulting for equity?
Essentially, it involves a consultant or advisor offering their services in exchange for a stake in the company. This can be an attractive option for both parties, as it allows companies to access valuable expertise without requiring them to pay high fees upfront.
First and foremost, consulting for equity can be a win-win situation for both the established SME and the consultant. For the SME, it allows them to access expertise and contacts that they might not be able to afford otherwise.
Jamie Simpson, a Private Investor, Non-Exec, and Growth Consultant for UK based SMEs, is one such consultant who has found success through this model. With extensive experience in M&A, business turnaround, growth, and scale-to-sale strategies, Jamie works with UK businesses with a turnover of £1m+ who want to exit for seven figures in the next three to five years by professionalising and systemising every aspect of their business.
One of Jamie’s consulting for equity clients is a Southeast England-based maintenance company. While the company had a steady stream of work coming in, its owners lacked the real-world business experience needed to stabilise and grow the company. After reading Jamie’s content on LinkedIn, they contacted him to come on board and help organise and professionalise the business so that it would have a tangible value in the future if and when they decided to sell.
Using his skillsets and contacts, this is what he was able to achieve in the first eight weeks:
Changed from a non-responsive and expensive accountant to an accountant who was half the price, proactive and would perform more tasks such as handling payroll and CIS payments.
Put in place Cashflow Forecasts, Profit Margin Analysis, Client, and Supplier Terms Audits
Replaced an invoice finance facility which had a £100k personal guarantee to a larger facility on better terms without a personal guarantee
Changed from paying staff weekly to monthly to improve cash flow
Immediately resolved a minor legal issue which was consuming a lot of unnecessary mental energy
Put in place professional and legally up to date supplier and staff contracts
Set up a new scaffolding division to diversify away from reliance on one main contractor with better payment terms
In exchange for a minority share in their business and a small monthly retainer, you can start to see the benefit of SMEs partnering with experienced business professionals,
The right consultant can save a company years of trial and error as they have a wealth of knowledge acquired the hard way and can bypass the learning stage and head straight towards tried and tested systems to produce a successful result.
Offering consulting services in exchange for equity can be a highly attractive option for consultants, as it offers the opportunity to work on exciting new projects while potentially earning a substantial return on their investment. In fact, if the business they’re working with is successful, the value of their equity stake could potentially far surpass any consulting fee they would have charged upfront.
Additionally, consultants who work for equity are often seen as true partners in the business, which can lead to deeper, more meaningful relationships with their clients. Jamie has experienced this first hand and thoroughly enjoys speaking to his portfolio companies on a daily basis where required to help them solve their problems and see the joy that progressing the business brings them.
Another benefit of consulting for equity is that it aligns the interests of the consultant and the business. When a consultant is paid a fee for their services, their primary goal is often to complete a certain project and move on to the next client.
However, when a consultant is working for equity, their success is directly tied to the success of the business. This can lead to a greater level of investment and commitment on the part of the consultant, as they are motivated to help the SME succeed to maximise their return.
Consulting for equity can also be a way for SMEs to access a wider range of expertise. When a business hires a full-time employee, they are limited to the skills and experience of that individual.
However, by bringing on a consultant who is working for equity, the startup can access a wider range of expertise and perspectives. This can be particularly valuable for businesses that may not yet be able to afford multiple departments and the skillsets that come with them.
Of course, there are some potential downsides to consulting for equity as well. One concern is that the consultant’s interests may not always align perfectly with the business. For example, the consultant may be more focused on maximising the value of their equity stake than on what is best for the business in the long run.
Additionally, owners need to be careful when offering equity to consultants, as they may be giving away a valuable stake in their business without fully understanding the potential consequences.
Despite these potential downsides, consulting for equity can be a valuable option for companies that are looking to access expertise without breaking the bank.
Jamie understands the importance of building trust with his clients. To de-risk the consulting-for-equity agreement for his clients, Jamie takes a proactive approach. For instance, in the case of the maintenance company mentioned earlier, Jamie has included a clause in the agreement that specifies a return of his shares for free if the company fails to achieve a certain level of growth in a specific timeframe.
This approach not only gives the business owners added assurance but also highlights Jamie’s confidence in his ability to deliver on expectations. By taking on an equity stake in the company and being aligned with the business’s long-term success, Jamie is incentivised to act as a true partner and provide the guidance and support necessary to help the business thrive.
In conclusion, consulting for equity can be a valuable option for small businesses and consultants alike. It allows owners access to valuable expertise without requiring them to pay high fees upfront, while giving consultants the potential for a substantial return on their investment.
However, both parties should approach this type of arrangement with caution and a clear understanding of the risks and benefits involved.
This is why it is strongly advised to a performance related clawback of shares for the owners as well as a potential uplift for the consultant if they over perform. This de risks the agreement for both parties and incentivises everybody to perform in the best interests of the business.
With careful planning and negotiation, consulting for equity can be a great way to build successful partnerships and help small ordinary businesses achieve their goals.
After all, it’s better to have 75% of a pie worth £3m than 100% of a pie only worth £250k.
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