Dear Insider,

Picture this: You’ve been a partner in your firm for two decades. The cost of your buy-in was determined by a long-standing formula laid out in the shareholder agreement. Over the years, two additional partners joined—one 13 years ago, another six years ago—both purchasing their shares using the same method.

Then, one day, you and your partners receive a call from an interested outside buyer. After exchanging some high-level financial information, the buyer indicates they’re willing to pay a sum far greater than what your internal model would yield. They offer a tempting proposition: a substantial equity pool for key employees and a chance for you to exit the firm in just a few years. Compare that to an internal sale, where proceeds would be at risk, the timeline could stretch to five or ten years, and the internal buyers would need to take on significant debt.

One of your partners is intrigued and wants to explore the idea further. Another partner is adamantly opposed, arguing that selling externally would rob future shareholders of ownership opportunities and jeopardize the firm’s culture of ownership. You find yourself caught in the middle.

What do you do?

For many business owners, this scenario is not a hypothetical situation. Even in the absence of a disagreement among business partners, owners face these questions whenever they consider an exit.

So, where should you begin?

Key Considerations for Evaluating Your Options

Before making any decisions, ask yourself these critical questions:

1. Have we fully explored the viability of both options?

• Internal Sale:
  • Is there a next generation of leaders ready to step into ownership?
  • Are they financially prepared and willing to take on the risk of buying in?
  • Does your valuation approach align with your goals for an internal transition?
• External Sale:
  • Have you assessed your firm’s marketability?
  • If you’re considering a single buyer, how confident are you in their alignment with your firm’s values and vision?
  • Have you discussed the critical issues required for any M&A transaction? We provide this list HERE.

3. Are these the only options for my firm?

There is a spectrum of transition strategies beyond the traditional internal or external sale. For example, private equity recapitalization offers a hybrid approach, combining elements of both. Other alternatives include exploring an ESOP or other creative ownership structures.

2. How does my fair internal value compare to external value?

A comparative valuation is essential to understand the difference between an internal sale and an external sale. If your valuation formula hasn’t been recently updated, it might no longer reflect current market conditions or the growth of your firm. We have more information on this comparative process and the nuances you can expect from this kind of exercise HERE. 

From Questions to Action

By addressing these considerations, you’ll gain the clarity needed to craft an effective exit strategy. You’ll identify the financial and strategic implications of each approach, allowing you to map out a roadmap tailored to your goals.

We encourage firm owners to have open, proactive discussions with their business partners and advisors before these decisions become urgent or contentious. Exploring your values and goals as they pertain to an exit as a business owner is the foundation for a successful transition, no matter the approach taken.

A Case in Point

In the scenario above, the ownership team reached out to PSMJ for guidance. After an initial consultation, we developed a plan that included:

• A Comparative Valuation: This provided clarity on the firm’s value in both internal and external sale scenarios.

• An Exit Strategy Workshop: Led by both a PSMJ internal transition expert and a PSMJ M&A advisor, the workshop explored all available options and gave the partners a space to discuss and align their priorities.

Ultimately, the ownership team decided to pursue an internal transition first. PSMJ’s internal transition consultant worked with them to build a comprehensive plan, but the prospective internal buyers declined, with concerns about the financial risks of buying into ownership.

We then reconnected them with our M&A advisor, who has been guiding them through an external sale process. They are poised for success, and we expect a positive outcome for them.

Your Exit Strategy

Have you thought about how to approach your exit? Do you know the options available to you and their implications? PSMJ recommends you plan for your exit from the first day you become a business owner. If you do not have the answers yet, PSMJ can help with information and tools to help you find these answers and meet your goals, but only you can determine what those goals are.

If you have questions or want to learn more, let us know with a comment below.

If you're interested in learning more about the world of M&A in this industry, PSMJ will be hosting the AEC M&A Summit on February 26-28, 2025, in the Grand Bahamas, with more information HERE.

*All comments are reviewed by PSMJ’s M&A advisory and ownership transition practice and are not shared publicly unless you request them to be.