Sean Magennis [00:00:16] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow scale and sell your firm at the right time for the right price and on the right terms. I'm Sean Magennis, CEO of Capital 54 and your host. On this episode, I will make the case that there is a good time to sell your boutique and a bad time to sell your boutique. I'll try to prove this theory by interviewing Greg Alexander, Capital 54's founder and chief investment officer. Greg has developed a set of indicators that firm owners can use to help time an exit. Greg, great to see you. Welcome.
Greg Alexander [00:01:07] Thanks, Sean. Good to be here. And what a great topic we have today.
Sean Magennis [00:01:09] Yeah, let's jump right into it. So how can an owner of a boutique professional services firm determine if the time is right to exit?
Greg Alexander [00:01:17] The first point I'd like to make is that timing does really matter. Often firm owners do not appreciate this fact. They are compelled to sell for some personal or operational reason. And they put themselves up for sale regardless of the macro environment. And when they are unable to find a buyer, they get frustrated.
Sean Magennis [00:01:36] Greg. So true. And forecasting the future can be extraordinarily difficult. So how can a listener understand when the time is right?
Greg Alexander [00:01:48] So I've developed a list of indicators that can point to optimal timing. You're right. Forecasting with precision is tough here, but there are some indicators that can maybe get you 80 percent of the way there. Things to pay attention to, allow me to share a few.
Sean Magennis [00:02:03] Great.
Greg Alexander [00:02:04] First. Pay attention to the deal activity in your niche. Niches get hot and they get cold. If firms like yours are being bought, this would suggest that it's a good time to sell. Second, analyze the transactions and try to determine the drivers behind the recent activity. Why are firms like yours being purchased at this particular moment in time? This will indicate the strength of the trend. And if it is likely to continue, if it is, then it might be a good time to sell. And then third, it is wise to consider the point in the economic cycle. One finds themselves in, for example, during times of economic expansion, the ability to exit goes up. And in contrast, during times of recession, the ability to exit goes down. Are these making sense?
Sean Magennis [00:02:57] Yes. Greg, they they are. So really pay attention to deal activity in the niche, the drivers behind the activity as a trend predictor, and then the economic cycle. Those are reliable indicators one can use to time an owner's exit. Are there any others?
Greg Alexander [00:03:18] There are some others. I would encourage our listeners to look at multi-year trends of their particular niche. Investors want exposure to growing markets. If your niche has a healthy organic growth growth rate and has for some time, this is an indicator. The timing is right.
Greg Alexander [00:03:38] I'd also point to the debt markets as they play a big role in the timing of an exit. If the banks are lending and are lending in a deals like yours, the ability to exit goes up a lot. If the banks are tightening, this restricts the funding available for your deal. And this will hurt your ability to close. And the last idea off the top of my head, expanding on the last comment is the pool of available capital in general. Are there large pools of available capital being deployed in your niche? For example, has your niche attracted private equity investors or private lenders or lots of strategic acquirers cetera? The larger the pool of available capital, the more likely you will be able to exit. Now, if the funds are not there, it will be very hard to pull off an exit.
Sean Magennis [00:04:32] Excellent additions to the list of indicators, Greg. So a multi-year organic growth rates, the state of the debt markets and the size of the available pools of capital. All these, our listeners can watch out for.
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Sean Magennis [00:06:05] So this takes us to the end of this episode. And as is customary, we end each show with a tool. We do so because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. And our style of checklist is a yes-no question. We aim to keep it simple. By asking only ten yes-no questions. In this instance, if you answer yes to eight or more of these questions, it is time to sell. If you answer no too many times, the timing may not be right. Let's begin.
Sean Magennis [00:06:40] Number one, are they large pools of available capital in your niche? Number two, are the multi year industry trends in your niche favorable? Number three, are banks lending in your niche? Number four, are private lending institutions lending into your niche? Number five, are interest rates low, allowing for deals to get done? Number six, can your boutique handle a decent amount of debt on the balance sheet?
Greg Alexander [00:07:21] So that's maybe a non obvious one and that's related to interest rates. So most of these deals will be funded with both equity and debt.
Sean Magennis [00:07:30] Yes.
Greg Alexander [00:07:31] And when somebody is considering how much debt they can put on a deal, they're thinking about the strain it would put on the PNL. So make sure you understand, you know, how much debt you can handle on your balance sheet and given the interest rate environment, what the debt service requirements would be on the business.
Sean Magennis [00:07:50] Excellent point, Greg. Number seven, are deals happening in your space? And Greg, a quick question on this one. Where does a boutique owner go to find out if deals are being done in the space?
Greg Alexander [00:08:03] Yeah, it's difficult because most of these businesses are private. So they're not publicly reported, you know, and required by law. But there's all kinds of specialty data sources out there that track deal activity, particularly in the private equity world. So, I mean, simply just a Google search.
Sean Magennis [00:08:26] Yes. Then investment bankers who specialize in the space are...
Greg Alexander [00:08:30] That's another great source for sure.
Sean Magennis [00:08:31] Excellent. Eight, do you know the drivers of this deal activity? Number nine, are you at the right point in the economic cycle? And number ten, if they had to, would a buyer make an all cash offer?
Sean Magennis [00:08:51] So in summary, there is a good time and a bad time to attempt an exit. Unfortunately, this is largely out of your control. However, there are indicators that can help you time your exit. Know what they are. Watch out for them. Listen to what the market is telling you. Be patient. Wait for the sun to be shining bright, then exit.
Sean Magennis [00:09:17] If you enjoyed the show and want to learn more, pick up a copy of Greg Alexander's book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I'm Sean Magennis. Thank you for listening.