The M&A market is very hot right now, with buyers aggressively pursuing acquisitions, so is 2021 the right time to sell your firm?
“Yes, but it depends on how your company fared in 2020 through COVID,” says PSMJ senior consultant Karl Wohler.
NON EVENT?
If COVID was a non-event for your firm, you’re in a great position to sell. If you had a COVID-related revenue and profit decline, consider these questions:
• How large was the profit decline and what is your timeline to a post-COVID recovery?
• Are you willing to be flexible on deal structure?
• Are you open to having some of the purchase price paid later based on a post-COVID profit recovery?
• What is your ownership transition timeline goal?
BEST VALUE
What you don’t want to do as a seller is make a milliondollar mistake in the ownership transition process. Wohler offers these 5 tips for getting the best value for your firm:
1. In an external sale, understand how the market values firms and use correct valuation metrics to drive business planning decisions. Not doing either of these “is the most common mistake made by business owners over the lifecycle of their ownership,” Wohler says. Adjusted EBITDA times a market price multiple is the predominant method used for external market valuation.
2. If your top client represents over 20 percent of revenue, work hard to reduce that percentage—and work even harder if that figure reaches 30 percent. “Buyers perceive client concentration as a cash flow stability risk and will walk from the deal or reduce their valuation to account for this risk,” notes Wohler.
3. Ensure that over several years, you’ve shared client relationship duties with several people in the firm so your departure won’t result in the risk of client loss.
4. Commit to nurturing and empowering the next level of leadership so that a lack of leadership development won’t be factored into a lower valuation.
5. Don’t fall victim to poor financial reporting or running your business on cash basis financials. If your firm is a cash basis taxpayer, like many A/E firms, run your books on an accrual basis and convert to a cash basis at year’s end for tax reporting. Developing adjusted EBITDA—earnings before interest, taxes, depreciation and amortization—requires the use of accrual basis financial reports, and this is very difficult to do after the fact. Running your business on cash basis reports can result in distorted reports and bad decision-making. If cash is tight, a separate cash flow report should be used to manage cash in conjunction with monthly accrual reports.
As you consider selling, no matter the past year’s challenges, don’t let a buyer undervalue your firm. “There may be some buyers that might come in low because of COVID,” says Wohler. “But companies are being sold at very fair valuations that I would say are similar to valuations they would’ve seen at the end of 2019 with the same profit scorecard.”