Getting a firm ready to sell begins well before a potential buyer is introduced into the equation. Even if a sale of your AE firm couldn’t be any distant or abstract of a concept, introducing a level of discipline and focus and accountability will almost always result in improved performance and, of course, improved curb appeal for those prospective buyers that are lurking out there.
To be sure, getting prepared for a potential buyer means covering the basic tactical tasks like cleaning up the financial statements (e.g. removing personal expenses, non-recurring expenses, non-operating assets, etc.) and getting/keeping various firm documentation in order. It also means covering higher-level strategic initiatives such as institutionalizing the firm’s value by breaking up dangerous concentrations in rainmaking efforts, client reliance, and firm ownership/leadership.
This is all well and good. But, there is one more area of transaction preparedness that is so often overlooked or pushed aside by sellers and it can be a non-starter for many potential buyers. The issue is one of bloated labor costs…utilization is down and other key financial performance metrics suffer as a result. The root issue is usually one or both of the following:
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Principal-level underutilization. Few issues can be more politically-charged in a firm that this one. We’re not talking about the market leader(s) that has had some tough quarters in the face of fierce competition and increasing fee pressure. We’re talking about the hot potato that nobody wants to touch; the principal(s) that retired on the job years ago. There are often loyalties and other concerns at play and, as a result, the issue is pushed aside for another day.
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Staff-level underutilization. This is a broader issue that can come as a result of a.) the principal-level underutilization (e.g. if the sellers aren’t selling, the doers have nothing to do) or b.) the underutilized staff are exposed to a weak or an increasingly competitive market and the firm has been reluctant to make cuts that would bring labor costs more in-line with revenue. Optimism usually takes control here…that market conditions will soon change, that attrition will make the issue go away, etc.
Whether the underutilization is at the principal level or the staff level, the fundamental issue is the inability of a firm’s management team to take action. Accordingly, one thing is true with these situations. That is, no prospective buyer wants to be perceived as “the bad guy”. And, the fastest way to be perceived as “the bad guy” is to come in and makes the cuts that were long overdue. Successful integration requires trust and credibility as the two organizations become one…that trust and credibility is awfully difficult to build in these situations.
Nobody is saying that it is easy to tackle these issues. Finding quality talent in this economy is difficult and it can be even more difficult to see any employee end up with a competitor. However, if it is any consolation, addressing underperformance at the principal level almost always results in an “it’s about time!” from management team and broader staff base. Additionally, open and candid discussion within the leadership team can often result in a win-win transaction that provides a dignified exit for the principal(s) whose passion is no longer with the firm. If this issue sounds like a familiar one, think about and begin to plan for this before speaking to any potential buyers in 2018.
Don’t let the buyer draw their own conclusions about the issue(s)!
Need some more ideas for building an acquisition pipeline and get to a winning transaction? Check out our popular two-day AEC Mergers & Acquisitions Senior Executive Roundtable designed exclusively for AE firm leaders!
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