If you read Mark Zweig’s columns or blogs, you know where he stands when it comes to marketing. He is a firm believer in creating a marketing plan that is proactive – reaches out to potential clients and touches them often. There are many firms that have taken this approach to heart and have been very successful with it. You would think that when it comes time for firms to sell their business and not just their services, they would take the same approach. You would be wrong.
In almost every other industry in our vast economy, firms that have decided that a third-party sale is in their best interest go out and proactively try to find the best match in terms of fit and price. For many reasons, most engineering firms have decided to sit on their hands and wait for the phone to ring. They may talk to a handful of buyers over the course of two or three years and find that, in the end, nothing worked out quite right and they have squandered precious time.
There are few events in the history of a business that will be more important than a sale to a third party. Based on the importance, it would seem that firms would want to be in control of this process rather than reacting to others. There has been much academic research done on transactions that have occurred with a buyer-initiated/single-source process and seller-initiated/multiple-source process. The research shows without a doubt that firms that create a competitive process yield higher prices than those that negotiate with only one party.
Buyers understand this all too well and many will discourage sellers to engage in a process because they do not want the price driven upwards. There is a reason why firms have resources that go into the marketplace to find exclusive deals. You also have to be cognizant of how the buyer’s representative is being compensated. In some cases, they may have a quota of firms they need to contact or they may be paid based on reaching certain milestones. Just because someone calls from a larger buyer does not mean that they are necessarily interested in purchasing your firm.
Price is not the end all for every seller. Often, cultural fit and certainty of closing are of equal or greater importance. Many firms create a process with multiple parties to ensure more than just a higher price, but also to give themselves the opportunity to find firms that are committed to closing a transaction. A multi-party process also helps you compare the cultures of different firms and find the best fit for your firm. Many owners of AEC firms think that a “process” involves calling every firm with even the most remote possibility of interest; this is just not the case.
While a broad process gives you a higher likelihood of finding the best fit, the owner ultimately controls who you target and how the process will be run. Hiring an outside firm to do the upfront legwork can help keep you focused on running your business rather than calling 10, 20, or 50 firms that may have interest in your firm.
Aside from contacting multiple parties, there are proactive things you can do today to ensure your firm is ready to go to market when the time is right. First, clean up any potential contingent liabilities. Secondly, get your financial reporting and administrative house in order. Focus on keeping better records and keeping things up to date. Look hard at owner’s compensation and either eliminate perquisites that would not pass the smell test with a buyer or begin to keep detailed records so you can show buyers where your firm spent money on owner’s extras. Lastly, make sure that your key employees will be tied up and loyal to the firm so you can show buyers that the staff that has made things happen in the past will be there for the future.
If a third-party sale is in your future, you need to be proactive about the process. Regardless of the timing or the format, you need to take the initiative. Waiting for the right opportunity to fall into your lap is not a prudent strategy for something so important.
W Hobson Hogan, a senior consultant at ZweigWhite, assists AEC firms with strategy formulation and ownership transfer issues, including buyer and seller representations. Contact him at firstname.lastname@example.org.