Good Question: Is an External Sale Still an Option?

Posted on: 11/18/16

Written by: PSMJ Resources, Inc.

Topics: Mergers & Acquisitions

Our M&A team gets the inquiries from time to time. A founding (often sole) principal has decided it is time for an exit…a quick exit. Maybe it is driven by an illness or another life-changing event. In fact, in some cases, this principal may already be out of the business. What happens to the remaining business?

You may not like the answer. Being completely candid, it is very difficult to sell a people-based business when you take one of the key people out of the equation. In most cases, the end result is a very sub-optimal outcome…clients leave, employees leave, and the business eventually dies.

When you think about a merger or acquisition, you need to think about “institutionalized” or “transferable” value. What exactly is a buyer buying? How can a buyer be reasonably confident in the future cash flow stream of the business? That is the problem here. If too much of the value is based on this one key individual, very little can be transferred without a long-term planning horizon.

So, what do you do if end up in this scenario? What happens if you are the founding principal of a small firm and you need to be out tomorrow? Here are your options:

Sell the resources not the synergies. This isn’t about cash flow or 1+1=3 or anything like that. This is a group hire and there is value for a buyer in picking up a cohesive experienced team. This usually ends up being a chief competitor who has the backlog to support more “doers”.
Regroup, refocus, rebrand. Think about a fresh start. This is a time when that next generation of leaders just might be able to step up. They haven’t had the training and have a lot to learn. But, if they really want it, get ownership in their hands (for probably a highly-discounted value) and get them going.
Orderly wind-down. See to it that work-in-process is completed, accounts receivable are collected, and work out a deal to refer future opportunities to a local competitor. This is always the least desirable option.

Pick the option that seems most viable and come up with a plan. Move swiftly and decisively. But, most importantly, keep in mind that this situation can be avoided! This is the whole reason for a succession plan with a well-written buy/sell agreement. It is also the reason for a solid strategic business that sets the framework for moving the organization forward.

Don’t get stuck in the situation where you HAVE to sell instead of a scenario where you WANT to sell!

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.