Dear Insider,

As we step into the last quarter of 2024, and the beginning of Fall, our M&A Advisory practice continues to hear from many firm owners who are reaching out for advice as they are inundated with calls from interested buyers. This past quarter has seen record levels of activity in M&A, and some markets are feeling it more than others. Whether it is your first time being approached or your ninth call this week, the experts at PSMJ’s M&A Advisory practice have a few recommendations for you as you navigate discussions with potential buyers.

There are a few considerations we recommend sellers explore with a potential buyer and amongst themselves:

• Look at their culture, how do they handle integration? What steps do they take to handle a smooth integration?

• How does the buyer treat their team? How do they get projects? How do they work on projects? How are decisions made by their team? How does their organizational structure manage and support those decisions? How does your team manage these decisions?

• What is their strategic goal or direction? How do they plan to grow or synergize with your business? How does their answer align with yours?

• Nobody knows your goals like you do. Understand the goals of all your shareholders. 

• How does the buyer manage retention of key personnel? What kind of growth opportunities would the potential buyer offer to your employees?

As you explore these questions, the fresh perspective may offer opportunities to improve your business in a variety of ways. The first conversations between a seller and prospective buyer are usually in a more relaxed setting where you get to know each other and both parties get a chance to understand what a potential partnership would look like. These kinds of conversations are typically held over a meal if the buyer contact is local, or a Zoom or Teams call if not. We always remind sellers, there is no harm in listening and engaging with an interested buyer.

To this we add a bit of caution to prospective sellers as well: there’s no such thing as a free lunch. Buyers typically afford the cost of placing these calls and conducting these conversations because they expect to find a below market deal initiated with a lone, unrepresented seller. 

How is this the case? How do sellers end up ‘giving away the farm’? There are a multitude of reasons that a given seller will lose out on a fair deal. A common one is a misunderstanding between the value of their firm on an internal basis, like when a firm owner sells shares to an employee and that of an external value, like when a firm is sold to buyers sourced from a fair and competitive process. Internal valuation can be expected to be heavily discounted from an external deal, and while there are many methodologies for an internal valuation, external valuations are generally done on a multiple of EBITDA.

Veteran buyers, like large strategic buyers and private equity backed platforms who canvas potential sellers, typically have an immense amount of experience conducting transactions. Most owners only sell their firm once. If a prospective seller does have experience with the value of their firm, it is usually the value of their stock on an internal basis which by nature is heavily discounted from what they could expect to receive in a fair market external sale. 

Prolific buyers know this, and their offers, while seemingly very lucrative compared to a deal done on an internal stock basis, most often would not hold water if compared to a fair market offer. Fair and competitive offers are most often found using an M&A Advisor, like the ones at PSMJ, where a select group of buyers are shown a seller’s firm via a confidential and competitive process, allowing the seller to select the firm that best fits their goals.

So where does that leave you? This does not mean you should hang up the phone. Like any matter in M&A, a decision to proceed in conversation is best done with optimistic caution. 

We often say in this business, life is long, and some conversations are just the start of a relationship with a potential future partner. This means it is wise to take that cautious approach, revealing information slowly as you build trust with the prospective buyer. If a buyer tries to push you to move quickly, do not be rattled, respect your own timeline. Remember- that there is a reason they are in discussions with you.

Want to learn more about the world of buying and selling in the AE industry? PSMJ hosts M&A roundtables where buyers and sellers gather to share their experiences and learn from some of our veteran M&A Advisors. Click here to learn more.

Do you have a question about M&A or is there a topic in M&A you would like to learn more about? Let us know in the comments below! We love receiving your messages and look forward to hearing from you.