Dear Insider,

The phone rings. The voice on the other end of the line is confident and warm. Paul found himself facing the question he had been putting off for years.

“Do I sell the firm?” 
The decisions that Paul made over the next few months had serious implications for his team and his company. 

We share his story to help you navigate the waters of the hottest M&A market this industry has ever seen.

In our previous edition, we explored the story of Peter W., an owner who strategically navigated his firm’s sale, resulting in significant financial rewards and long-term growth. Today, we explore what can happen when an owner pursues a quick sale without advisory support.
 
How did the decision to sell quickly impact Paul H. and his team? What lessons can be drawn from this alternative approach?  To protect the confidentiality of the individuals involved, we’ve changed their names and identifying details.
_______________________________________________________________________________________
Paul and the Proposal
At 57, Paul H. was the owner and CEO of a 75-person mechanical contracting company based in the Southwest. With a successful track record and steady revenue growth, Paul had built a respected business known for its expertise in HVAC systems for institutional clients.

Paul contacted PSMJ’s advisory team early on in those discussions, but ultimately decided to go it alone. When we saw the announcement of his firm’s purchase, we connected with him to both offer our congratulations. In the course of our continued discussions over the next few years we gained the insights that we now share with you.
_______________________________________________________________________________________
Any Port in A Storm
Paul believed the offer was fair and reasoned that selling quickly would simplify his transition into retirement. However, this rapid decision came with significant oversight.

Had Paul sought an external valuation or explored multiple buyers, he might have discovered his firm’s true market potential. His company’s niche expertise, client relationships, and recurring revenue streams could have commanded a significantly higher multiple in the open market.

But instead of evaluating his options, Paul moved forward with the better of two offers. This buyer had offered $15 million, which was greater than his internal valuation- a multiple of book value.
_______________________________________________________________________________________
The Sale
Within five months, and with the help of his corporate counsel, the deal was finalized. The buyer, a local strategic competitor, acquired Paul’s company for $15 million in total consideration with $12 million cash and $3 million in earnout over 3 years. 

While Paul walked away with a sizable, if significantly below market, payout, the remaining shareholders and key employees were left out of the equation. Unlike the carefully structured transactions that define and build great partnerships, energizing teams to make returns on a buyer’s investment, Paul’s quick sale offered no such benefits. This approach would ultimately be to the detriment of his team, the buyer, and to Paul.

For a better understanding of valuation, and the risk Paul incurred by only comparing the offer to his internal value, take a look at this M&A Insider article from October 10, 2024: https://go.psmj.com/blog/either-you-go-in-or-you-go-out-but-dont-sell-yourself-short 
_______________________________________________________________________________________
The Aftermath: 
Several issues arose in the first year after the transaction:

•    Employee Turnover: Key employees, many of whom had expected some form of equity or financial reward, left the company within a year of the sale. Likely disillusioned with their opportunities in the firm. Their departure caused operational disruptions and a loss of institutional knowledge.
•    Client Retention Issues: Long-standing clients grew frustrated with the reduction in service that came from the smaller team, resulting in a significant drop in repeat business over the next two years.
•    Difficult Outlook: While we do not keep ongoing knowledge of Paul’s firm’s financial performance, the implications of these issues are not good, and he is unlikely to have met his earnout goals.

Paul’s firm is still running, many of the team’s members remain but the firm is not what it used to be. The transaction was successful in that the firms were joined, but it is hard to call this a win for anyone. 
_______________________________________________________________________________________
Paul’s Perspective
Now 61, Paul reflects on the sale with mixed emotions. While the immediate financial gain will likely allow him to retire in the next year or so, he admits he could have achieved much more had he taken the time to understand his company’s true market value and engaged professional advisors.

“I thought I was making a simple, smart decision,” Paul says. “In hindsight, I left a lot of value on the table—for myself and for the people who helped build the company.”
_______________________________________________________________________________________
Key Takeaways
Paul’s story highlights the risks of rushing into an M&A transaction without proper preparation and guidance:

1.    Know Your Value: Don’t rely solely on the first offer you receive. Engage professionals like the M&A Advisors at PSMJ to assess your firm’s market value and uncover its true worth.
2.    Explore Your Options: Take the time to understand the market and seek out a few prospective partners that would match your goals. It often takes meeting a few prospects to understand who is the ideal one for you.  
3.    Consider Your Team: A well-structured deal set up with an M&A advisor can provide financial rewards and growth opportunities for your employees, ensuring the long-term success of the business, both for you and the buyer.
4.    Plan Beyond the Sale: Retaining a stake or negotiating favorable terms for your people can yield significant returns in the future both for the owner, if rolling equity, and the buyer as they gain a motivated and capable team.

Had Paul gotten a valuation when he was first approached, he would have seen the range of value available to him, which if nothing else might have helped him navigate the process better. 
When you get a phone call looking to explore a discussion around M&A, make your next call to PSMJ’s M&A advisory team to get a valuation and discuss the options available to you to meet your desired goals.
_______________________________________________________________________________________
What’s Next?
Are you considering an M&A transaction? Want to learn more about maximizing your firm’s value? Feel free to leave us a comment below or connect with us here: https://www.psmj.com/advisory-services/mergers-acquisitions-representative-transactions