Dear Insider,

You know it’s coming. The day of exit. Are you ready? Is your firm? At PSMJ, we recommend an owner begin considering their exit strategy the first day they become an owner. But maybe, like most owners, you’ve saved this question for a little later on. Maybe, like some owners, you’ve saved this question for just a few years from when you want out.

The question now is: how do you prepare? Buyers evaluate a firm for acquisition based on a few key risk areas that you can improve as an owner. Ask yourself the following questions as you consider exiting your firm, because you can expect to face these questions from any buyer worth their salt.

For this discussion, let's assume you were looking to sell to an outside buyer, but these are beneficial questions for anyone considering selling an ownership stake in an architecture, engineering, environmental, or construction firm.

What is your firm’s value? Does that number meet your needs as a seller? 

Value is often viewed as the baseline scorecard for an acquisition, i.e. you must have ‘this’ much profitability to be considered by a given buyer. In this industry, buyers almost universally base their value on how much their firm generates in reliable profit for the owner. This is measured by adjusted EBITDA and is based on a multiple of that number. Simple, right? The adjusted part of EBITDA means you add back any non-recurring expenses.

For example, if you provide your team with bonuses to drive a motivated and invested team on a regular basis, those won’t count towards your profitability as viewed by a buyer. Why? What would happen if you removed those bonuses tomorrow? Your team would be shocked and upset; some might even leave. Good buyers want to make your team happy and see them continue driving the firm towards success.

Otherwise, the list of things that get normalized include any one-time non-recurring expenses, owners’ benefits and expenses, will be normalized to adjustments.

It’s important to note here- any increases you can make to adjusted EBITDA will have multiplicative gains for you as a seller. An increase of just $50,000 in adjusted EBITDA at a multiplier of 4x would increase the sale value of your firm by $200,000. 

With a clear picture of your value set, the next questions are: 

Who is the rainmaker at your firm? Will that person be here in five years?

Consider this, one of the best ways to prepare your firm and yourself for exit is to build the firm to run itself without you. If you still hold most of the relationships with your clients, or if you drive most of the growth on your own, then what will buyers really receive the day after you leave or decide to step back?

We should mention here that this transition of responsibility is critical for any owner looking to exit. If you fall into this category, evaluate who your best people are and consider how to develop them into rainmakers. It’s best to diversify this responsibility across multiple individuals to reduce risk.

If you already have a great group of individuals leading this part of the business, consider how your team manages itself. Do you have a strong organizational set up? Are your people driven and are they given opportunities to grow professionally? 

Speaking of concentration-

Is your revenue concentrated with one client? Are any of your major relationships at risk?

Most buyers consider there to be an issue with client concentration when over 25% of your revenue is concentrated with one client relationship. What if the individual on the other end of that relationship woke up on the wrong side of the bed and decided to discontinue future business? It’s important to explore your client relationships. PSMJ provides a survey service that helps with this here and allows you to produce a verifiable clean bill of health for these relationships to anyone interested.

Are your financial reports clean and regularly reported? 

Do you have a CFO or someone who can fill that role who can pull this kind of information monthly? Buyers will want to understand the financial performance of your firm, and as you navigate discussions with them, how it continues to do. Typically, buyers will look at the most recent three years of financial performance as your report card based on an accrual basis and want to see your year-to-date (YTD) performance. Once you enter into deal discussions, they will want to see how you are doing on a monthly basis, keeping that YTD performance as current as possible. This becomes especially pertinent during the due diligence period of a given transaction. 

Some of these steps take time, so if you are short on that, you may not be able to dive into them. Others are just a matter of a few weeks. Each of them constitutes what we would refer to as the framing questions of any transaction.

Are you ready?

With these questions answered, the next step is to find the best partner to meet your goals. First you will need to market your firm to a select group of buyers. Then you’ll need to evaluate which of these buyers is the best fit for your needs to create an ideal partnership. Finally, you’ll need the right assistance to navigate the waters of the transaction and its due diligence period to bring the deal to closing. 

For each of these steps, having a reliable M&A advisor, like the ones you can find at PSMJ’s M&A Advisory practice, is a key part of this process. The right M&A advisor knows how to introduce you to the right partners for a confidential but competitive process to ensure you get the right price with the right people.

For that final step, when you’ve made your choice of transaction partners, you’ll want legal and tax advice to join your M&A advisor. We can’t overstate how critical it is to find an attorney with M&A experience. Good deals are built on navigating the delicate fairway of negotiation, not bullying the other party. A veteran M&A attorney with experience from dozens of transactions will know how to guide you through this process and get to closing. 

Quite a few steps, right? This is just the beginning. Consider this- the process of navigating the transaction process, from sourcing the right buyers to navigating the nuances of a transaction takes anywhere from 6-12 months or more. You will want to tackle the preparation pieces years in advance to ensure you are ready when the time comes. 

You can learn more about this and everything else to do with M&A at PSMJ’s upcoming M&A Summit in the Grand Bahamas, as well as network with buyers and sellers, and learn more about where the industry is now. Find out how to register with the early bird discount here.

Any comments or questions? Let us know below: