Five Ways To Completely Botch An External Sale

Posted on: 03/31/17

Written by: PSMJ Resources, Inc.

Topics: Mergers & Acquisitions

The A/E space is a highly fragmented industry and, as a result, it is composed of a great number of small firms with fewer than ten or fifteen employees. Many of these firms grew from a one-person operation to the profitable and successful operations that they are today. However, at PSMJ, we hear frequently from leaders of these small firms that are at a crossroads.

Most frequently, these leaders are facing one or more of the following challenges to continued growth and prosperity of the business:

A changing competitive landscape.
An internal succession bottleneck.
Bigger professional development objectives.

While many of these businesses have been quite successful operating independently, they have reached a point where succession of the business will come through an external sale through a merger or acquisition. With this as a backdrop, there are some key pitfalls to avoid when considering or embarking on the process of selling a small architecture or engineering firm. Here are five of them:

Serious reservations and conflict as to whether external sale is the right course of action. Of course, there will always be some reservation and reluctance in this. But, candid and transparent discussion among the ownership/leadership team is a must. In the end, not all will agree with the strategy but they must agree that it is the selected strategy. Don’t get into serious discussions with prospective buyers until there have been some serious discussions inside the firm.
Viewing internal succession and an external sale as mutually exclusive. To some extent they are mutually exclusive. That is, in a small firm, you cannot be executing both at the same time. However, building a team and creating value with the long-term expectation of aligning with a like-minded strategic partner for continued personal and corporate growth is a very viable strategy.
Unrealistic valuation expectations. Again, there is always some degree of reluctance in this and that is often, in first generation firms, driven by a level of sentimental value. Buyers don’t’ buy sentimental value. Further, buyers will seek institutional value as opposed a firm’s fortunes that are tied largely to one or two rainmakers. Get an outside opinion on the value and marketability of the firm before going to the negotiating table.
Unclear picture of what post-acquisition life will be. It won’t be cash at closing and riding off into the sunset. Especially if there is a lot of firm value tied up in key individual(s), expect to stick around for a while. And, more than just stick around, expect to be working quite hard. Make sure that you are completely comfortable with your post-acquisition role (and reporting relationships) and ask plenty of questions about this in the early courtship stages.
Not keeping the firm transaction-ready. Let’s say that you aren’t actively marketing the firm but are passively open to considering opportunities. Most buyers will cut you some slack and be somewhat patient while you gather requested information. However, this only goes so far. Financial statements that must be created from scratch or that are loaded with personal expenses can be a big turn-off. Additionally, a well-conceived and up-to-date strategic business plan can go a long way towards showing a prospective buyer that remaining independent is a very viable option.

BONUS WAY: 6. Failing to attend PSMJ’s A/E/C Mergers & Acquisitions Roundtable. In a defenses-down and confidential setting, this is one of the best industry-specific ways to get up to speed on the entire M&A process from starting the strategy to setting expectations in post-closing integration. This one small investment could have a big impact on the outcome of your sale.

The last A/E/C Mergers & Acquisitions Roundtable for the Spring 2017 season is scheduled for May 16 and 17 at The Westin Michigan Avenue in Chicago and, as of M&A Insider press time, a limited number of seats were still available (early-bird pricing ends on April 17). Visit www.psmj.com/ma-roundtable for all the details!

Merger & Acquisition (M&A) activity in the architecture and engineering space is certainly on the upswing and well on its way to reaching pre-recession levels. But, how ready are you for taking on the task of buying or selling an A/E firm? If you are looking for tips to help your firm navigate through the M&A process, check out PSMJ complimentary ebook M&A Survival Tips for A/E Firm Leaders.