Tag: Exit

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The Art of Silence: 6 Reasons Not to Tell Your Employees About the Pending Sale of Your Firm

The Art of Silence: 6 Reasons Not to Tell Your Employees About the Pending Sale of Your Firm

Hey there, fellow founders of boutique professional service firms. If you’re contemplating selling your firm, you’re undoubtedly entering into a complex and potentially game-changing process. It’s a decision that requires careful planning and execution, and one of the crucial questions on your mind might be whether or not to inform your employees about the pending sale. In this blog post, we’re exploring the six compelling reasons why you should consider keeping your cards close to your chest when it comes to sharing this news with your team.

    1. Deals Often Fall Apart During Due Diligence

Let’s face it, folks – deals in the world of business can be as unpredictable as a roll of the dice. Many a promising transaction has crumbled during the due diligence phase for various reasons. Telling your employees about a sale that might not even go through can create unnecessary stress and anxiety. It’s better to maintain business as usual until you have a signed agreement in hand.

2. Employee Distraction Can Lead to a Dip in Results

When the word gets out about a pending sale, employees may start to wonder about their job security. This uncertainty can lead to a dip in their performance and focus, which is the last thing you need during a critical phase like a sale. Such distractions can also undermine the confidence of potential acquirers, making them question the stability and viability of your firm.

3. Loose Lips Can Sink Ships

Employees are a talkative bunch, and news of a pending sale can easily leak into the industry grapevine. Competitors might seize this information to their advantage, and even your clients might pause their relationships with you, uncertain about the firm’s future. Keeping the sale under wraps can protect your business from unnecessary turbulence.

4. Deals Morph During Due Diligence

During the due diligence process, deals often undergo significant changes. These changes can affect who stays, who goes, and the overall structure of the transaction. Until the final details are ironed out, it’s prudent to maintain confidentiality to avoid unnecessary confusion and anxiety among your employees.

5. You’ll Need Everyone On Board to Hit Your Earn Out

If your sale includes an earn-out clause, it’s crucial to keep your team motivated and engaged. Prematurely disclosing the sale can lead to a spike in turnover, with key employees potentially leaving before the deal is finalized. It’s essential to maintain a cohesive and committed team to meet your earn-out goals.

6. You Might Decide Not to Sell

Finally, and importantly, founders have a tendency to change their minds at the eleventh hour. The allure of selling might wane as the details become clearer, or unforeseen circumstances might arise. If you’ve already told your employees about the sale, you’ll face a difficult and potentially disruptive situation if you decide to back out.

In Conclusion: Maintain the Art of Silence

In the world of business, discretion is often your best ally. While transparency with your employees is generally commendable, when it comes to pending sales, it’s often wise to err on the side of caution. Keep these six compelling reasons in mind before prematurely sharing the news with your team.

Remember, a successful sale requires careful planning, strategic thinking, and a well-executed process. Maintain the confidentiality necessary to navigate the complexities of the transaction smoothly. When the time is right, and the deal is firm, you can share the news with your employees, providing them with the stability and reassurance they need to thrive in the transition.

So, dear founders, as you venture into the exciting world of selling your boutique professional service firm, keep these reasons in mind and play your cards close to your chest until the right moment arrives. Your employees will thank you for it, and your potential acquirers will respect your professionalism and discretion.

If you are contemplating a sale of your firm, consider joining Collective 54 by applying here. You can learn a lot from a community of peers going through the same process as you.

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When Your Exit Needs an Exit: Navigating Financing Contingencies in M&A Deals

When Your Exit Needs an Exit: Navigating Financing Contingencies in M&A Deals

Embarking on the journey to sell your business is a monumental decision, especially for small to lower-middle market business owners. It’s not just a transaction; it’s a pivotal moment that can shape the future of what you’ve built. However, amidst the excitement and potential for growth, there lurks a critical challenge that could derail your plans: counterparty risk, particularly the risk stemming from financing contingencies.

Understanding and addressing this risk early on, specifically at the Letter of Intent (LOI) stage, is crucial. This stage is your best opportunity to gauge the likelihood of a successful transaction before becoming too invested. For businesses in the small to lower-middle market sector—those with total sales under $150 million—engaging in a sale process is not only a significant financial commitment, involving advisors such as attorneys, financial analysts, and accountants, but also a substantial investment of your time.

Counterparty risk in M&A transactions can arise from various sources, but one of the most common and challenging to navigate is the buyer’s inability to secure adequate financing. This issue can affect deals across all market segments and involves both financial buyers (like private equity firms) and strategic buyers (larger companies within your industry).

At the LOI stage, it’s essential to critically assess the risk associated with the buyer’s ability to obtain appropriate financing for your transaction. Some LOIs will explicitly state that the deal’s closing is contingent upon the buyer obtaining suitable financing. However, even without a specific financing contingency, a buyer’s limited access to necessary funds—whether through equity or debt—poses a significant risk to closing the deal.

This financing risk can manifest in various ways:

    • The buyer may have access to financing, but it comes with stringent conditions;
    • The buyer’s ability to deploy cash to purchase your business may be subject to loan covenants restricting investments made to purchase other businesses (like yours) under the buyer’s existing credit arrangements, or otherwise require the approval of the buyer’s existing lenders ; or
    • Alternatively, the buyer could be attempting to raise capital to fund the equity portion of the purchase alongside negotiating the deal.

For business owners, understanding these risks and the potential impact on your transaction is vital. In navigating these waters, the key is to engage in thorough due diligence and direct communication with potential buyers about their financing plans and capabilities. At the LOI stage, it is customary to conduct interviews with key buyer personnel, and appropriate to ask direct questions about the ability of the buyer to purchase and then operate your business. If a buyer cannot commit to make a purchase of your business from available cash, you should ask the buyer to provide you with copies of any written equity or debt term sheets from outside parties in order to assure yourself of the buyer’s ability to rely upon outside financing. You should review those term sheets alongside your financial advisors and attorneys to understand what conditions attend the release of funds for the purchase of your business. Additionally, you should also ask your potential buyer whether they have existing credit arrangements and what conditions those arrangements might impose upon your transaction. In situations where you have the good fortune of evaluating LOIs from different counterparties at the same time, you should obviously preference favorable offers that also present the greatest certainty that the buyer can accomplish a closing of your transaction. This proactive approach can help mitigate risks and ensure that you’re entering into a transaction with a clear understanding of the potential hurdles, saving you time and protecting the investment you’ve made in pursuing the sale.

You might determine that there is still substantial uncertainty about your buyer’s ability to close. For example, if your buyer will be reliant upon an equity capital raise to partially fund your purchase price, it may be reasonable to conclude that the closing could be delayed, or cancelled, if their capital raising efforts are unsuccessful. In such events, you should discuss your options with your advisors to determine the customary protective measures you can take, or agree upon with your buyer, in the event the buyer is unable to close. For example, in smaller transactions (where the purchase price is $5mm or less) requiring a deposit of some portion of the purchase price for the seller’s security is not uncommon and even recently I have seen deposits used in much larger transactions (>$50mm purchase price). Some private equity sponsors are agreeable contribute up to 100% of the purchase price in equity (called a “full equity backstop”) if they are unable to obtain sufficient debt financing to fund a purchase. Although they are uncommon in middle-market transactions, reverse termination fees (where a buyer pays the seller a fee if it cannot close a transaction within some period) and arrangements to pay seller costs where a buyer is unable to close a transaction are other options that should be considered.

In conclusion, while the prospect of selling your business is an exciting one, it’s accompanied by significant risks that need careful consideration. By focusing on counterparty risk at the LOI stage, especially related to financing contingencies, you can better navigate the complexities of M&A transactions, ensuring a smoother journey towards a successful sale. We at Troutman would be delighted to help you evaluate both the counterparty risk related to your buyer and all available strategies to mitigate that risk.

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Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

Mastering the M&A Landscape: Identifying the Right-Sized Buyer for Your Boutique Professional Services Firm

As a founder of a boutique professional services firm, you may be contemplating your exit strategy. Understanding the M&A landscape is crucial to identifying who is most likely interested in acquiring your firm. In my experience, the most suitable buyers are typically firms that are substantially larger than yours, generally by a factor of 5-20 times the size of your firm. Here’s why:

The concept of “moving the needle” is central in M&A. For an acquisition to be worthwhile for a buyer, it must have a meaningful impact on their business. However, if the acquisition is too large, the risk and effort involved in closing the deal can become prohibitive. Therefore, a sweet spot exists where the deal is significant enough to be compelling yet manageable in terms of integration and financing.

To identify potential buyers in this sweet spot, we employ a simple yet effective back-of-the-envelope valuation method. By multiplying the number of employees a firm has by $200,000 (a figure that roughly estimates the revenue per employee for professional service firms), we can gauge the size and suitability of a potential acquirer.

Let’s walk through an illustrative example:

Imagine your firm has 10 employees and generates $2 million in revenue. You’re eyeing a sale, and you want to find a buyer for whom your firm would be an attractive proposition without being overwhelming to absorb.

If we apply our method, we’re looking for a firm that has between 50 and 200 employees. Here’s the math for the lower end:

50 employees x $200,000/employee = $10 million in revenue

And for the upper end:

200 employees x $200,000/employee = $40 million in revenue

These figures suggest that companies within this range would find an acquisition of your firm substantial enough to “move the needle” but still be a feasible transaction to complete.

Your next step? Start researching firms that fit this employee count and approximate revenue scale. Industry databases, networking events, and even LinkedIn can serve as starting points. Keep in mind that cultural fit, strategic alignment, and the specific services your firm offers will also play critical roles in attracting the right buyer.

By focusing your search on firms that fall within the 5-20x size range of your own, you increase the likelihood of finding a genuinely interested buyer—one for whom the acquisition of your firm represents a significant, but manageable, opportunity for growth.

Remember, while the revenue-per-employee method is a guide, it’s not a substitute for a thorough valuation and strategic fit analysis. Engaging with a knowledgeable M&A advisor early in the process can help refine your approach and identify the right targets, setting the stage for a successful transaction that delivers value for both you and the buyer.

If you are trying to figure out how much your firm is worth, who to sell it to, and on what terms, consider joining Collective 54 by applying here.  These questions, and many others, get answered by your peers and a curated set of advisors.

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How to Know the Right Time to Recap or Sell Your Business: An Investor’s Perspective

How to Know the Right Time to Recap or Sell Your Business: An Investor’s Perspective

Imagine you’re in a game where your character has a treasure of immense value, attained through years of sacrifice, risk taking and toil.  The objective of the game is simple – find a buyer for the item and transact at a mutually acceptable price.  Easy, right?  Well, there’s a twist[1]:

    • The buyer’s identity and location are a mystery
    • You can only transact once (i.e. no do-overs)
    • The item’s value fluctuates, and
    • A poorly-timed trade may sentence you to a lifetime of regret and self-loathing

Yikes.  Who would want to play that game?  Well, this mirrors the journey that founders embark upon when contemplating either a recapitalization of their business with a private equity firm partner (a ‘recap’) or the full sale of their business  (an ‘exit’).  Not to worry, there are people and insights that can help across all of the anxiety-laden dimensions of planning a recap or exit.  While the ultimate decision is yours, you are not alone.

Indicators That It’s Time

This piece will focus on timing and is informed by my nearly 20 years of experience as an investor in and seller of businesses.  Interestingly, across the matrix of decisions that a business owner has to make, timing of a recap / exit is one of the more straightforward exercises.  The trick is knowing what indicators to look for.  So, without further ado, here are some signs that the timing might be right:

    1. A comparable business in your industry achieved an appealing valuation. If you see another founder deciding to engage in a recap or exit transaction, it may merit introspection on your own transaction timing.  What’s good about another founder “going first” is that the multiple they sold for will eventually become known in the circles that care about these things[2].  We suggest reaching out to the investment banker(s) that worked on the transaction to learn about what attributes of the other business buyers focused on the most (i.e. the “value drivers”).  If you would like an introduction to one or more investment bankers who have strong qualifications and successful transaction experience working with owners of B2B professional services firms, please email me, and I’ll connect you. 
    1. Proceeds from a transaction will allow you to “hit your number”.  Admit it, you have a magic number in mind (after tax) that you would like to achieve from all of your efforts to develop your business.  This number is typically informed by various objectives for life in retirement such as estate planning goals,  philanthropy, or simply enjoying the well-earned fruits of your labors.  The reason for defining this number before you consider a transaction is to prevent clouded judgment during negotiations.  Therefore, if a transaction is likely to meet or exceed your target, then the timing could be right.  Remember the adage, “Pigs get fat, hogs get slaughtered.”   As importantly, when considering a recap vs. an exit transaction, keep in mind that the recap will provide you with two opportunities to monetize the value created by your team’s efforts while the exit transaction is a one-shot payout.  So the total proceeds and likelihood of reaching your target amount may be substantially greater in the recap scenario.  I’ll share more on this very important topic of recap vs. exit transaction in an upcoming blog post.  
    1. You’ve experienced multi-year growth in revenue and profits. In the words of Bruce Lee, “Long-term consistency trumps short-term intensity.”  This certainly applies to how investors will assess the quality, sustainability, and growth potential of your revenues and profitability.  For instance, if you have an abnormally great year with outsized profitability, you might conclude that you should exit to capitalize on your inflated earnings.  However, if your surge in EBITDA is attributed to one-time revenue wins or other unsustainable factors, a buyer is not likely to give you anywhere near full credit for it. Further, if your financials have been volatile such that there are a lot of ups and downs one year to the next, you’re not going to garner the same multiple as a business that elicits more confidence in the predictability of future financial metrics.  Consistent growth creates a reassuring storyline that will attract more interest.
    1. Value remains for a new investor. Sometimes looming headwinds can drive an owner’s decision to exit.  Conceptually, getting out before these challenges arrive makes sense, but it’s likely that investors are already, or will be, attuned to those same issues, and it may then be too late to drive an optimal outcome from a sale.  Would you purchase an orange with all of the juice squeezed out of it?  Clearly not.  At a minimum, investors are going to need to know that the prospects for growth will remain strong for the next 5-10 years.  Otherwise, they may encounter challenges when they ultimately seek an exit.  Think of it this way, reflect on whether you would want to invest in your business today.
    1. Bringing on a partner could help address the strategic needs of the business. For first-time founders of growing businesses, it’s a truism that their company is the largest entity they’ve ever managed.  For a time, managing growth can be fun and present an array of “high class problems” whose solutions can be fulfilling to solve.  However, growth can transform manageable hills into formidable mountains whose successful summit requires the support of someone that has climbed them before.  A good partner, like a sherpa on Everest, will see the opportunity that these mountains present and be able to help you develop a path forward.  Common strategic challenges that get a founder thinking about bringing on a financial partner include (i) their industry’s transformational change, (ii) investing in and building a formal and scalable sales and marketing system / organization, (iii) a sizable add-on acquisition, or (iv) professionalizing / incentivizing a management team.  

While these signs can guide your decision, the ultimate choice is personal and nuanced, and I wish you well in making it with the full support of your trusted advisors.  Get in touch any time if you ever want to talk through where you are in your journey.

About RLH Equity Partners

RLH is a private equity firm with over 40 years of experience investing in rapidly growing, founder-owned, knowledge-based B2B services firms.  Our value creation strategy is defined by a heightened focus on culture, continuity of founder leadership, an emphasis on organic growth, and a conservative approach to the use of debt.  In our long history, we’ve invested in and divested dozens of businesses and made many decisions about the optimal time to sell the companies in which we are investors.

[1] There are certainly exceptions to all of these items, so simply accept them here for the sake of example.

[2] Two other advantages of allowing a peer company to go first are (i) the number of viable targets for the interested investor/buyer universe has been reduced by one which improves the scarcity value of the remaining peers and (ii) the prospective investors/buyers who finished second, third, and fourth in the process to acquire the peer company probably still want to acquire a business similar to yours and are logical targets for your transaction process.

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Episode 163 – The Art of Valuation: Unveiling the Secrets Behind Firm Attractiveness and Price Determination – Member Case by Tom Zucker

In this session, we review recent research from over 200 acquirers that suggests the 5 attributes that make a firm an attractive acquisition target, and the 4 attributes that scare acquirers away. The research quantifies how “attractiveness” drives up valuations and how you can increase the worth of your firm.

TRANSCRIPT

Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, the host of the Pro Serve podcast, brought to you by Collective 54, the first mastermind community dedicated to the unique needs of a unique group of people. The leaders of boutique professional services firms. And today, we’re continuing on our exit series and we have a wonderful guest with us. He is a member. His name is Tom Zucker, and he is in the investment banking business. And his firm put out a piece of research called The Seller Experience Why Owners Get Premium Values. We’re going to talk about the principles in that. And the origination of this came from we had a member session. Titled how a ten person firm successfully sold itself to a 300 person firm. One of our members bought Mirage was the featured role model. He had an exit recently. This is episode 153 for those that are interested, and Tom attended that session and chimed in and offered some value. And since that time we had a lot of members saying, hey, who was that guy? And can we hear more from him? So we reached out and and Tom was gracious enough to join us today. So, Tom, if you wouldn’t mind, please give us a brief introduction of yourself in the firm. 

Tom Zucker [00:01:33] Right. Thanks for having me. Tom Zucker, president of Hedge Point. We help private owners sell their business for maximum value. With certainty. We’ve been doing this for 25 years, and we’re very fortunate to be part of collective 54. 

Greg Alexander [00:01:49] Excellent. So I read the white paper, The Seller Experience Why Owners Get premium values. And it was compelling. And I found it compelling because you heard directly from buyers. What makes a firm attractive. And it’s that word that really caught me, this word of attractiveness. And in your white paper you quantify, for example, what a some firms get eight times, EBITDA and another firm might get ten times EBITDA. And you summarized five key points that made a firm attractive. I thought maybe we could take them one at a time. And I’d ask you to define what that term is. And then, when we have our private member Q&A session, which is a longer format, we’ll have a full hour. Then we’ll dive into examples for each five and let members ask questions. So if you’re okay with that, why don’t we start with the first one, which, I’ve got the paper pulled up here in front of me, and it looks like the very first attribute that makes a firm get a premium value makes it more attractive as a strong management team. So why does that increase the multiple? 

Tom Zucker [00:02:58] The ability to produce revenues is directly proportional to the talent that sits behind it. So here we are as professional service firms, we are as good as the people that leave the office every single day. Right? And so our goal on a daily basis is to make sure when the buyer takes over the business, they can not only repeat the success that you have, but can grow from that. If you have aged professionals or you have people that are less engaged or just, quite frankly, have reached the top of their peak, there is no more growth that the company can experience. 

Greg Alexander [00:03:30] Very good point. You know, sometimes I see, you know, the founder is brilliant and the buyer meets the founder and says, oh my gosh, I want that person in my firm. They make a they offer a lie, they get into diligence, and they meet the management team. And there’s a major drop from the founder to everybody else. And it kind of spooks them. And they retread the other side. Either don’t do the deal or they trade it down so that I’m not surprised to see that as number one. So let’s go to number two, which is a differentiated service. So why does that increase the multiple. 

Tom Zucker [00:04:07] There’s if you think about a buyer’s perspective, you’re looking at your company. There’s a lot of people that are nice to have, a nice to have trade at reasonable multiples must have, oh my gosh, I need that capability. I need that person that’s differentiated. And so, you know, many of the sessions you’ve been having is on the topic of AI. AI is a unique skill set that many people possess. And as you start having those conversations and show that you’ve developed something that will take years or many, many hours to develop, I got to have that. And when I get I gotta have that, I get a turn to three, five times, expansion of multiples. 

Greg Alexander [00:04:46] Yeah. We got a member right now. Just turned down an offer at 17 times. He’s in the sustainability space, and it’s just hard as heck it’s a must have for a lot of cases. So, I’m not surprised that that was number two. All right. Let’s go to number three. So resilience in recessions or resilience in kind of new tech threats. So tell us what that is and why that leads to an expanded multiple. 

Tom Zucker [00:05:13] Yeah. And remember keep in context these these are things that were generated. We did a 200 person survey private equity family office strategic buyers. Why do they pay premiums. So they came up with the idea is that they’re fearful that something doesn’t continue or go forward. And the indicators they use is let’s take me back to what happened in, you know, the last recession or what happened during Covid. And they’re constantly asking that question. And so if you’re defensive, the answer is we have we continued right through there. No problem. My recurring revenue was there and all of my clients needed me. I was an essential service that was not cut back or passed back during downtimes. Yeah, and that’s when you get a premium, when you when you have that recurring revenue. Banks love it. And switch is a big part of how multiples get made. Right. 

Greg Alexander [00:05:57] Yeah. You know 2023 wasn’t a good year for a lot of people. If you actually had a decent year in 23, you proved to be resilient, resilient when everybody else wasn’t. You know, someday when you go to sell your firm, that’s going to be a wonderful proof, proof point. The next one I want to talk about, which I skipped over by mistake. But let’s come back to it. Strong market position. So what does that mean exactly? And how does that translate to a higher multiple? 

Tom Zucker [00:06:23] Everyone is trying to define what market they’re in. So you mentioned that one of your members getting a 17 times offer for the word sustainability. Right. And every couple of years there’s a new word that hops out that somebody’s got to have. And when you got gotta have that. That tends to make it very attractive building market position, you know. So for example, we’re in the middle market space for investment bankers. Many of my competitors have sold their business. We’re now sitting in a place where we have a very attractive platform that we’re able to. We just brought on a new managing director, that market position as being a platform for capability of providing, you know, independent M&A advisory service that allows us to be differentiated from others. Not. Not that it’s unique or can’t be duplicated, but at a point in time there’s a market position and all of our services fall into that category. And I’m surprised when we begin doing our work. How many people really don’t know the market, that they participate in the adjacent markets, and they certainly don’t know what makes them different from their competition. And that’s an exercise that a good investment banking firm does. They really pull out. Why are you special? Why are unique, why you’re different, and most importantly, not just from your own perspective, but the perspective of your buyers? How will they look at you? 

Greg Alexander [00:07:38] Yeah. You know, and this is why it’s so important to pick the right investment banker. And for our members and listeners, you know, you want somebody that’s in that middle market to lower middle market space because they know that you might not have your market position clearly defined. So therefore they’re skilled at doing that for you. It’s kind of like you go to sell your house and you hire a fantastic real estate agent who’s been selling homes in your neighborhood for 20 years. So when a buyer comes in, you know, they can explain why this is a desirable neighborhood, why it’s in the right school district, why the comps are what they are, etc., etc., etc.. Last thing you want to do is go higher up Goldman Sachs or JP Morgan. You know, you just they expect you to come to the table with a different, set of deliverables. I mean, they expect you to know what your category is, what your market position is. So it’s really important that if you’re thinking about exiting, you pick the right investment banker and you can hear from Tom, you know, somebody like him, knows how to do this and has the patience, you know, to help a first time founder don’t through an exit for the first time, do this. All right. Let’s come back to the white paper. So the last one, number five is scalability of business. I think I know what that is, but why don’t you explain that to the audience and why that translates to a higher multiple. 

Tom Zucker [00:08:55] This is a great book called The Boutique that my friend Greg has written, and it talks about this whole scaling phase, right? And as you talk about scaling, you get a commercial business development engine. You’ve got the ability to take it beyond the founders capabilities. And it is tantamount to much of what you preach and disciple to. But I want to know that I can take, you know, this business for two times revenue, and I want to know the profitability grows incrementally as I scale. Yeah. And I always refer to it no man’s land. That’s between X dollars a revenue and Y that it’s really, really hard to run a scale professional service firm. And once you get past why, likes a whole lot better. And so we all have our own X’s and y’s and whatever that number might be or whatever the scale might be. That’s the part that we always are looking for. And so I want to know that I can do that as a buyer of a business. 

Greg Alexander [00:09:46] Yeah. You know, when I, when I was reading the paper, I really liked it because to me it’s not a puff piece. It’s not just talking about the five things that make your firm attractive. The second half of the document is dedicated to the value detractors. In other words, what makes your baby ugly? So why don’t we? Why don’t we touch on some of those value detractors? So share some of those with the audience and and why they actually reduce the multiple. 

Tom Zucker [00:10:17] Yeah. I mean, so it’s kind of the inverse of attractiveness, right. And so if I’ve got a concentrated position where I have a customer that represents, let’s say it’s north of 40% of revenue, I get a little bit concerned that that particular customer goes away or loses interest in it or changes pricing. That’s a very big detractor. The other part of that is if if it’s dependent on you, the owner of the phone, right to your point, you get really excited. Very attractive owner founder. He’s excited, but unfortunately he’s of an age where he’s not doesn’t want to work for another 5 or 10 years. Yeah. And so I make my investment. What’s private equity is make it for, you know, a 5 to 10 year window. If you’re not going to be the guy that I look to not only run during that time period and more importantly, when I sell it, you’re not standing there. I’ve got a big lift. I’ve got to find somebody to replace the magic that you do as a founder and owner. That’s a really hard thing to do. And so you have to solve that problem for the buyers. The buyers won’t solve it for you. Yeah. 

Greg Alexander [00:11:13] You know, one that jumps out of me that I want to translate for the audience in the value detractor category in the report is this thing called an at risk supplier. And for those that are going to go to Tom’s website and download this report and we’ll show you where to get it in a second, you might say, well, that doesn’t really, apply to me. I don’t have suppliers. I’m not a manufacturer. Well, that’s not true. You do. Your suppliers are your talent. And if somebody is thinking about buying you as a service firm and you were using 1099 contractors, you have at risk suppliers, particularly if you’re using 1099 firms and only one of them. You know, these these firms, especially offshore ones, can run into trouble. They go out of business. And all of a sudden your raw ingredient, you know, your raw material that you use to produce your end product goes away. You’re not going to be able to sell, you know, in the pro serve space. They call that empty calories. In other words, when I buy you one of the assets of buying is your team. And if you have more than, let’s say, 20% of your labor force in 1090 nines. Then you really you don’t have a great team to acquire. So you. I’m either not going to acquire you or I’m going to acquire you at a discount. So, Tom, that was a great walk through of the report. So for those that are listening to want to get a copy of it, where do they find it? 

Tom Zucker [00:12:45] It’s point.com and we have an insight section where you can download this white paper plus others. 

Greg Alexander [00:12:51] Okay. And if somebody reads it and they want to double click and have a conversation with you or someone on your team, how do they get Ahold of you? 

Tom Zucker [00:13:00] (216) 342-5858. Zucker at any point that. Com. 

Greg Alexander [00:13:06] Boy. That’s a salesman at heart right there, who was willing to give his telephone number into the wild, wild world of the internet. God bless you. All right, well, listen, we’re so lucky to have you because our members are your target customers. Your skill set lines up perfectly. You know how to sell businesses like the ones that are in collective 54. You’re always very generous with your time and your knowledge here. Today was a great example of that. So on behalf of the members, thank you for being here. 

Tom Zucker [00:13:32] Thank you Greg. 

Greg Alexander [00:13:35] Okay. And, a couple calls to action for everybody. So if you’re a member, be sure to attend the private Q&A session with Tom and look for the outlook meeting invite to tell you exactly when that is. I hope you get a chance to read that paper beforehand, and you’ll get a chance to ask questions directly to Tom.  You’re not a member. I don’t know what’s wrong with you. You should become one. Go to Collective 54.com. Fill out an application. Some will get in contact with you. If you’re not quite ready for that, you just want to consume some more content. Check out our newsletter. It’s called Collective 54 insights. Again, that’s at the website. Or if you want to read the book, it’s called The Boutique How to Start, Scale and Sell a professional services firm. You can find that on Amazon. But until next time, I wish you the best of luck as we try to grow, scale, and exit your friendship.

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Episode 156 – Sealing the Deal: The Critical Role of Management Meetings in the Successful Sale of Your Firm – Member Case by Matt Rosen

Matt Rosen

In this session, we delve into the pivotal function management meetings serve during the intricate process of selling a firm. We’ll explore how these gatherings can effectively showcase the company’s strengths, address potential concerns, and foster a sense of trust and transparency with prospective buyers. Attendees will learn how to leverage management meetings to not only impress buyers but also to secure a favorable sale outcome.

TRANSCRIPT

Greg Alexander [00:00:15] Hey, everybody. This is Greg Alexander, the host of the Pro Serve podcast. Brought to you by Collective 54, the first community dedicated to founders of small services firms trying to grow, scale and someday sell their firms. On this episode, we’re going to talk about the mechanics of exiting your firm. In particular, this thing called the management meetings, which typically happens during due diligence. And we’ve got a well-respected, long-tenured, well-liked member of Collective 54 with us today. His name is Matt Rosen, and Matt has recently gone through his successful exit and lived through the management meetings and has a lot to share with us. So, Matt, as always, it’s great to see you. Thanks for being here. And would you introduce yourself to the audience? 

Matt Rosen [00:01:08] Yeah, too kind of an introduction, Greg. Thanks for having me on the podcast. So I’m Matt Rosen and I’m founder and CEO of A Leader. A Leader is a consultancy focused on digital excellence that helps our clients with everything from technology, strategy and user experience through custom dev integration data and then supporting the solutions that we build. And so we went through an entire process and an exit to an investor about a year ago. And it’s been a really a great experience, better than I actually thought it could be. And Collective 54 was a great help at every step along the way. 

Greg Alexander [00:01:48] Great. All right. Well, let’s jump into it. So we’re going to talk about management meeting. So let me start with the very basics, Matt. So you went through this exit. Give us a definition of the management meeting or meetings and kind of. When did that happen? And walk us through the basics of this. 

Matt Rosen [00:02:10] Yeah. So we actually started looking at options in 2021 where I’d say we had a few dates where we had an investment banker bring us both a private equity firm and a strategic. And so they came in and spent some time with us. But it was in 2022 we really went through a formal process where we built a SIM, did equality of earnings, sent it out, and then we really had two stages of meetings. We had what they termed as fireside chats. So this would be a one hour conversation with the prospective buyer. And it was only after we had an intent of interest or an IOI that we actually did management meetings which were like a four-hour onsite session. So for the fireside chats, these were more of an introduction. These were mostly held via Zoom teams, virtual meeting with other the we really looked at a couple of different classes of buyers. There were strategics, there was private equity-backed strategics, and then there was private equities that were looking for us to be the platform. We decided early on that the only way we were going to do a transaction was if we were the platform and we were the right size and had the right team to do that. And so as we were evaluating different options, it was myself, my chief operating officer, my chief strategy officer that were involved in the majority of the meetings, both at the fireside chat stage and then the management meeting. 

Greg Alexander [00:03:39] Okay, perfect. So let’s talk about the fireside chats first. So one our Zoom meetings, three people from your team with potential acquirers on the other end of the line. The objective is an introduction. So tell me a little bit about what was covered during those meetings and how you prepared for them. 

Matt Rosen [00:04:00] Yes. So everyone had our SIM and our quality of earnings, so they already had a base understanding of our business. So I think a lot of it was just trying to for them to understand us, who they were talking to and for us to understand them. And I wish I could say we did tons of prep. We really showed up and just shared who we were and what we were looking for. We had rehearsed things like, Hey, what’s the one question we don’t want to get asked? And, you know, we’re places they’re going to take us that we need to have prepared responses. And so we practiced those. But really, once the fireside chats got going, we were doing a couple of day. We probably did. I would say somewhere between 15 and 20 of them. And at this stage, I was really more evaluating the prospective buyers than they were probably evaluating me. And the ones that I really respected were the ones that asked, Why? Why are you all here? Why do you want to do a transaction? What are each one of you looking for? Professionally and personally out of this? And there was only a couple of them that really asked that question. And so it was kind of funny. We actually knew who we were going to. Our top choice was after the fireside chat. Now, obviously, we kept everybody else engaged to keep a competitive process going, but it was pretty apparent early on to who we wanted to partner with. Yeah, but the type of questions they asked was, you know, tell us about the founding of the company. Tell us about what each one of you does. Talk about, you know, top clients talk about how you retain your people. It’s all very, I would say, basic and high-level information that, you know, frankly, is in the same. I think they just want to see how you’re going to answer it. So I found the fireside chats to be, you know, light engagement. And it was interesting. There were some of the big strategics that literally just wanted to tell you their process, asked very few questions. And so we eliminated some of those very, very early on because there were those that were looking to stroke of a true partnership and those who just want to acquire a bunch of people and capabilities and push us to the side. One story I will share that one of the groups that came in to look at us as a platform had the audacity to come into the fireside chat and tell me that they went from founder-led to professionally managed. So the three of us walked out of that meeting and debriefed and were like, Well, all of us can be out of a job in about 18 months if we choose this group. So we kept them around and I won’t name them for confidentiality purposes, but you know, they were really rough to deal with throughout the process and were exactly what I didn’t want a private equity sponsor. So it was good to have that contrast when we actually were serious about, Yeah. 

Greg Alexander [00:06:33] You know, and you were very fortunate and that you’ve built a great firm and it was growing, so you had a ton of interest. So 15 to 20 fireside chats was appropriate, you know, for, for members that might not be in that similar situation, they’re not at the same scale that Matt and his team are at. You might have fewer of those, but, you know, the goal was an introduction and it sounds like, you know, it was a bi-directional introduction and it served its purpose. All right. So let’s move to, you know, the official management meeting, not the fireside chat, but the real one. So tell me a little bit about you mentioned they were 4 hours in length, so quite a bit more intensive. Walk me through that. 

Matt Rosen [00:07:11] Yeah. So we were very fortunate, as Graham mentions, you know, we probably did 15 to 20 fireside chats. We had 11. I was actually a few people tried to preempt the process with letters of intent, but we said we wanted to go through the management team meetings before we signed off on an otherwise. So we invited, I think it was five groups to Dallas. One of the groups is actually based in Dallas. We just went to their offices, but we sat down in an afternoon session in a board room and walked through our SIM in detail. Oftentimes they had prepared a pitch of what a partnership with them would look like. To help us understand how would this relationship work? What would the board look like, what would their responsibilities be? You know, would they have an operating partner not have an operating partner? Then they really asked us a series of intensive questions and they dug pretty deep. I mean, they did their analysis. We did have some concentration risk, so they dug really, really deep into those relationships and really got to know who they were with. What was the nature of the work, How were we building it, what was the structure of the teams? And so they went pretty deep during those those four hour sessions. And after that, we either did a lunch or a dinner, which was, you know, them getting to know us as people and us getting to know them. And so those management team meetings required a bit more prep. We had wanted to representatives from our banker in the room with us, you know, to help with any detailed financial questions. But at this point in time, you know, they’d been exposed. We’re a data room. They pretty much had access to everything we had to share. We had nothing to hide. You know, we were fortunate not having any lawsuits or crazy things that happened. We run a pretty clean set of books for three years since I founded it. And so a lot of the questions we got that were the most challenging were really just around customers, people retention, what were plans to grow. We also shared with them we had a list of acquisition targets that we wanted to go after, and that’s part of the reason we took on an investment is I had never done M&A. I don’t know how to go to the capital markets and get money. And so we were looking for the expertise of a private equity partner that could bring both of those and take on some of the risk and let us take some chips off the table and recapitalize the company. 

Greg Alexander [00:09:27] So who was in the room? So it was it the same three you, your CEO, your chief strategy officer, plus a couple of people from your banker? And then who was in the room from the. Party? 

Matt Rosen [00:09:40] Yes, a good question. So we had two or three strategics and then three private equity platform meetings. And so when we met with the strategics, it would be their president, their head of M&A, and maybe a key person or two that we’re going to be involved in the integration that would be there. And we kept a really tight circle at later on the entire process. Almost nobody outside of the three of us knew other than our controller and our CTO, until the very, very end. We reveal it to them literally a week before we closed. And it was a really positive thing because we I give a lot of my rolled equity to our senior leadership team. It really sent them to stay. And so it was it was a good situation that we were able to explain. So during the strategic meetings, it was three or four people from their end, it was me, my CEO, Phil Leary, my Chief strategy officer, Trish Webb, that were that were in the room. And then literally the banking team head, Greg, who was the lead banker, and he had a team of four that were part of it to the transaction. And so it would be one or two of them that would be there for the meetings. One was the platform meetings. They were bringing the 2 to 3 folks that were going to be on our board. And so we got to see who we were going to be working with day in and day out over the next 3 to 5, seven year old period as we got to know them, because obviously those are the people who are going to be working with very closely. So there’s no bait-and-switch type scenario that we were talking to the folks that were going to be our board and our team until the next transaction. Yep. 

Greg Alexander [00:11:11] You mentioned Greg. That’s Greg Fink from Equity Tech, who’s also a member of Collective 54, and he was Matt Rosen’s banker. I’ve seen Greg execute these meetings. I’m assuming that Greg and his team played the role of facilitator. Is that correct? 

Matt Rosen [00:11:26] They did. They would tee up the meetings, they would organize that, they would get the agenda out ahead of time and they would keep things untracked. They were also really helpful when there was a really deep financial question asked, they were able to jump in, but for the most part it was the my myself and my senior leaders that really led the meeting and of really tried to have them do a lot of the talking. Obviously, they know the aspects of the business at a more detailed level than I did, and I was very fortunate to have Phil interest, you know, in the trenches with me preparing all the information and being there to present it and explain it to our potential suitors. 

Greg Alexander [00:12:01] Yep. And the content of the meeting was the same, correct? 

Matt Rosen [00:12:06] I’m sorry. 

Greg Alexander [00:12:07] The content of the meeting was the same as that, correct? 

Matt Rosen [00:12:11] The content of the meeting was the same, but generally what they were, it was very similar. They wanted to understand what was the founding story. What? How did we go to market? What did our customers look like? What type of work were we doing? What did we incent our people? And we retain our people? What differentiated us? What were our service offerings? And then it turned to, Well, if we become your partner, how are you going to grow? And that was more so in the platform conversations. They really wanted to understand who are we going to acquire, what strategic directions, where are we going to go, how are we going to expand our ability to go to market? When it was the strategics, it was more a conversation of how, how and where were we going to fit into their team? 

Greg Alexander [00:12:54] Yeah. Okay. You know, a point that I would like to add for listeners is that, you know, Matt suggested that he let his executive team do a lot of the talking. And that’s really smart. And that’s something that all of us should pay attention to, because when somebody is in a management meeting, an investor or strategic thinking about making an acquisition, they want to make sure that there’s a real team. You know, there’s not an overdependence on the founder because, you know, God forbid something happens to the founder, you know, does the firm fall apart? So it’s really important to have a solid management team in the management meetings. And I think that’s why these meetings are called management meetings, in part is to assess the quality of the management team. All right, Matt, one last question before we wrap it up here is, you know, was this a high-stress moment for you? And, you know, and looking back on it now, was the stress appropriate or were they easier than you thought they were going to be? Kind of give us a retrospective? 

Matt Rosen [00:13:49] Sure. Yeah. So I’m sitting here. The transaction happened in September of 2022. So we’re know, 13 months in now. And looking back on it, you know, the process itself was not quite as grueling as I had envisioned it to be, at least not the fireside chats and the management team meetings. I mean, I had to get together with people and talk about my business, and that’s what I do all day long. I would say it was by much more stressful for my CFO and Chief strategy officer, as well as our controller, who had to put together a lot of the documents in preparation meeting. I think they had a bit more PTSD around the process than I did. You know, the meetings themselves. We were very fortunate. We didn’t have to sell the business. Not everyone’s in that position. So we went into it and I started almost every meeting saying if I can’t look my people and my clients in the eye and tell them this is good for everyone, not just me and my leaders, we’re not going to do the transaction. So we were in a position of strength from a negotiation standpoint with with all the suitors involved. And we had a lot of suitors at the table. Kotek and Greg ran a great process and had a lot of good options for us. So we were fortunate and the timing was right. And so I would say the hardest part was once we signed and although I went through due diligence, you know, where I got most heavily involved in the negotiation of legal contracts and employment agreements, the non-compete and all all the equity structure, I would say that was the most stressful part was the last couple of weeks leading up to closing. But the process itself of getting people interested in our business and talking about what we do, I actually found that kind of fun. You know, the only downside to it and anyone who goes through the process is you’ve got to have people kind of running the business as you’re selling the business because it’s easy to get distracted. And I think this happens with every firm is, you know, the whole process, you know, either ends with a sale without a sale, but with key leaders not keeping an eye on the ball, the business things do tend to slip. And so I think an important thing to think about if you’re about to go through a process, is make sure you have people that can sell the business, make sure you have people to run the business because it becomes a full-time job being part of a deal team. 

Greg Alexander [00:15:53] Yeah, that’s good advice. It is all time-consuming for sure. Okay, so let’s just put a bow on this thing. So we’re breaking down the mechanics of an exit. And today we spoke about one element of it, which was this mystical thing called the management meetings. And we learned that there’s really two types is the fireside chat. And then there’s a formal management meeting, and we learned a little bit about what their goal is, why they happen, who attends them, how you prepare, what’s covered, etc.. And and we heard from Matt Rosen who recently went through this. So so Matt, on behalf of all the membership, as always, thanks for coming and giving back to the community. Really appreciate it. 

Matt Rosen [00:16:31] But be on. Thanks for having me. 

Greg Alexander [00:16:33] All right. Well, a couple of calls to action for those that are listening. So first, if you’re a member, look for the meeting invitation formats, Q&A session, where you can ask him your questions directly of these management meetings. We’ll go into much more depth and allowed on a podcast. If you’re not a member and you think you might want to become one, go to Collective 54 dot com and fill out an application. We’ll get in contact with you. And if you’re not ready for that, you just want to kick the tires and learn a little bit more. Check out my book called The Boutique How to Start Scale and sell a professional services firm, which you can find on Amazon. Okay. With that, That’s the end of this week’s episode. I wish you all the best as you look to grow, scale and sell your firms.

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Episode 153 – Small Giant Merges with Industry Titan: How a 10-Person Firm Successfully Sold Itself to a 300-Person Professional Service Behemoth – Expert Case by Bart Mroz

In this insightful case study, we delve into the remarkable journey of a nimble 10-person professional service firm as they navigate the complexities of selling their business to a 300-strong industry leader. From leveraging their specialized expertise to fostering a culture that resonated with their larger counterpart, this session discusses the key steps taken by the smaller firm to position themselves as an indispensable asset, paving the way for a merger that promises to be a win-win for all parties.

TRANSCRIPT

Greg Alexander [00:00:10] Hi, everyone. This is Greg Alexander, the host of the Pro Serv Podcast, brought to you by Collective 54, the first community dedicated to founders of small services firms that are trying to grow, scale, and someday sell their firms. On today’s episode, we’re going to talk about exiting a small service firm. It’s a very precise thing to do. It doesn’t happen a lot. So when it does happen, we want to shine a light on it and learn as much as we can. And we have an alumni of Collective 54 with us, Bart Mroz. Bart was on an episode of our show before way back in the day Episode 72. I think we’re like in the one seventies now, so it’s good to see you again. Bart. Would you please reacquaint yourself with our audience and provide us an introduction? 

Bart Mroz [00:01:05] Absolutely. It’s great to see you, Greg. Yeah, so I am for the last 13 and a half years, ran company called Sumo Heavy. We were an eCommerce consulting firm and button shop, working closely with enterprise level clients. We, I think, talk we’re talking about Discovery’s if on the rack. 

Greg Alexander [00:01:29] Yeah, you walked us through that and how that led to kind of long standing client relationships, which was an awesome episode. 

Bart Mroz [00:01:36] Yeah, it was fantastic. So funny enough, I am an alumni of of the group. Part of it is because I was going through this all through the year. So. 

Greg Alexander [00:01:49] So yeah, so let’s talk about this. So I read the press release and thank thank you for sending that. I was so happy for you in your team. It’s the conclusion of an entrepreneurial journey. I know you’re still there and you’re still building, but it is a chapter in the story of an entrepreneur when this happens. So I just I want to start at a high level and just, you know, have you tell everybody what happened? And then I’ll have some questions for you. 

Bart Mroz [00:02:16] Sure. Where do I start? About a year ago. A little bit over a year now. I was needing to get out of the house and randomly went to. I was living in Princeton, New Jersey, randomly went to a place and bumped into now our VP of Innovation at the at ATX, which is my new company and just had a good chat with it and just randomly ran into somebody. And it it kind of took that took it to a conversation with them and then they came to Val was like, If you are ever willing to sell your company, let me know. And about six months later, I had a conversation. My business partner were kind of looking at what the market looks like. What are we doing after 13 and a half years is like, are we going to grow this or is there other avenues that we can have? And I gave him a call and then work through the summer and and we got to this point and then on September 1st we are fully acquired, which is always a challenging find. But as a smaller firm, it was it was interesting to go there. 

Greg Alexander [00:03:29] You know, the fact that this was a random encounter, you know, it makes you wonder if if the cosmos was lined up for you here and you were doing the right thing, that that’s a very hard luck. 

Bart Mroz [00:03:41] But also part taken that luck. Right? It’s the serendipity of it. Yes. It’s probably partially putting out there that there’s some need. But also, you know, people say is like always in luck. I think it was a luck thing because, you know, 30 minutes before or third means after walking, you know, until place, it could have changed it. Right. But then taking that opportunity that’s in front of you and have conversation with somebody random kind of get you to that point. 

Greg Alexander [00:04:09] Yeah. I mean, we’ve got to make the most of our lucky breaks and and not waste them. I get it totally. So what I was particularly interested to talk to you about today, because it’s so relevant to our community, is that you had a ten person firm and a lot of people feel that a ten person firm is a non sellable firm, yet you proved all those people wrong and you were able to sell your firm. So how did you overcome that and how did why was is it it is that right? Why was this why was it interested in you all? 

Bart Mroz [00:04:42] So at our height, so we’re 13 years, 13 and a half years, almost 14 at our height, we’re actually 30 and meaning 30 with our contractors, and we’re about 12. 13 at the most here in the States. But because we had this efficient, nimble kind of company, we got to work with larger clients, got to work with them long term. Have some way of a different way of working. As with our last podcast, it was about doing discoveries and discoveries. Because of that, it’s all our being the process and how we work and how we work with our clients. And the fact that we had long term clients was attractive to a bigger company, but also for us from our perspective. Once we started talking to them. It became very clear that there just a very large version of us. We’re like a micro version, meaning our culture is the same. We kind of think the same way. We want to go after the same things. It kind of became clear this is making more and more sense. Now, this was, you know, we got acquired in this one, but this was not our first go at trying to get acquired. We’ve done it two years beforehand and it just didn’t fit what we wanted. And we said no, 80% because of culture. And 20% of because money just made it financially didn’t make sense. Like it just it wasn’t working. The numbers didn’t make sense and all that. So a lot of it was culture or a lot of was that the other side of it for us was having access to a bigger. Of services. You know, we’re very structured on e-commerce, but we’ve never had UX or design or marketing or other things we were trying to pursue. Now we do, you know, it takes us 300 people. So it’s a bigger company. We have a lot more services. On the other side of that, I it had a little bit of econ going on with them. With us, they have the knowledge base now of bigger econ that they can kind of pursue. 

Greg Alexander [00:07:06] Yeah. You know, the lesson here for those that are listening is that when a large firm is thinking about buying a small firm, they often go through a framework called Build, buy or partner. 

Bart Mroz [00:07:19] Mm hmm. 

Greg Alexander [00:07:19] And what I mean by that is they’ll have a gap in their service offering. So in Bard’s case, that was AECOM. And they say to themselves, okay, if we want to fill this gap ourselves, we’re going to build it. Here’s how long it’s going to take his on which money it’s going to cost. And here’s the probability of success. If we were to go partner with somebody. You know, who are those partnerships and same conversation. How long, how much in probability success. And if we buy someone, same thing. So if I compare those items, you know, as a larger firm, what’s better for me, it’s it’s a a way to think through the options. So obviously, in Bart’s case, it just made a lot more sense for them because they could go faster, they had a greater probability of success and, you know, the cost was comparable. So why not go ahead and and buy a firm like Bartz and bring them in? Yeah. 

Bart Mroz [00:08:06] I mean, you’re, you’re looking at you know, do you bring like this is this was our problem too. Like we at least twice a year we would think about do we build design and use sort of practice internally every year, twice a year without fail? And we just never did it. Right. But also, you know, when you’re doing this, you’re acquiring not only the the staff, the team members who are knowledgeable, especially in small firms, they probably have a lot of senior people because they’re willing to do that work, especially if they’re working with bigger clients. There’s growing client. So you have both. Right. You have not only the knowledge base, but also clients, and then you can bring all that knowledge base. You know, it’s a nice circular thing. It just beneficial to every single step. 

Greg Alexander [00:08:49] Yeah, for sure. And it’s beneficial to everybody, including the client, because now you have more things to offer the client, and that’s normally how the justification gets made. The business justification is. So Bart had a great client roster and I t-x, you know, wanted access to that roster and vice versa. I text probably had a great client roster and you guys want access to it. So then the question is, okay, so if we join forces is one plus one equals three here. And obviously it did. So that’s part of the equation. So if you’re if you’re a smaller firm and you’re thinking about selling, you got to ask yourself that question, like, what is the synergy? I don’t mean the cost synergy, I mean the revenue synergy. If we shared clients and we had brought a service set, you know, how much more revenue could we drive by? My next question was I was I was reading in prep for this interview some of the local press that that covered you, by the way. I had no idea you were such a towering figure in the local tech community. Congrats. 

Bart Mroz [00:09:41] Not but thank you. 

Greg Alexander [00:09:43] A lot of the articles were people worried about, you know, you leaving and not participating in all that. One of them classified your acquisition as an acqui hire, which is the merging of two words, an acquisition and a hiring of a team called an acqui hire. Very common in the tech world, not as common in the service world. So that intrigued me. Is that a fair description as to what happened in or not? And what do you think about this idea? 

Bart Mroz [00:10:12] It’s a very it’s actually, Greg, I’m going to correct you, but it’s actually very common right now. Is it really. 

Greg Alexander [00:10:17] Interesting? 

Bart Mroz [00:10:18] Oh, yeah. The same day that we got acquired, one of my friends companies that I acquired Acquired like that. Yeah. So basically the idea is they’re they’re hiring you and they’re acquiring you, basically acquiring, you know, your clients or your things, but also hiring rest of your team. Yeah. So for me, it’s not like the whole team went. So we are now owned by biotechs, Right. But it’s still within those. Rob’s right, my friends. Like, I think the same they I would say four different companies, one within. Between and every single company was between ten and 20 people. Wow. Yeah. From from different. You know, they got fired by other places, obviously, but literally same day and all friends. But yeah, we we all knew this was all happening at the same time, which was really funny. So it’s it’s in service business right now is is that is going to happen and I think that’s it’s a correct statement. I don’t you know some people think it a bit as a as a bad thing. I think it’s fine. I think it’s it’s I feel like it’s worse when it’s a startup, you know, it gets acquired and then it’s like, oh, it’s purchase and stuff like that. When it comes to services, I mean, there’s, you know, we’re not billing it or not. We don’t have technology to sell. We just have humans and humans making things for other clients, right? So it’s it is what it is. Yeah. And I think that’s a good thing. It’s, it’s not it’s, I think it’s a better thing when it comes to service companies because they’re, they’re actually acquiring the whole thing with the team members and the team players don’t get fired, you know, then they lose their jobs. They’re still they’re still there. You know, I. 

Greg Alexander [00:11:57] Mean, I agree. I agree. I think it’s a it’s a much better thing. And I personally don’t view the term as a negative term. I view it as a positive term, although I have read the things that you’ve read where sometimes people talk negatively about it, particularly in the startup context, as a way to kind of firesale a failed startup. But in services it says it’s a people business. It makes a lot of sense and it’s just it’s a mechanism to get a deal done. And I think for the smaller firms, let’s say sub 50 people, it’s an avenue worth pursuing if if that’s something that you want to do. So. So what’s life like for you now that you’re part of a bigger firm? 

Bart Mroz [00:12:37] It’s been it’s been two months, literally, actually two day. So eight weeks. Stressful, crazy, fun all at the same time. You know, as you can imagine, I’m coming from doing a lot of the admin stuff and a lot of sales and that things that that, you know, that requires company to do My business partner was the production side of it and delivery. So he’s stepping into having a delivery team that’s his that’s still our you know, our people. I’m step by step into the sort of the sales operation or what we call engagement leads the management and sales that’s side. And I’m actually really happy to have four or five coworkers in that space now because I was doing this by myself. Yeah, so that’s kind of fun. Um, it’s still, it’s a little bit stressful just because moving, you know, moving your clients over, getting all of those, all those things wrapped up and moving stuff around. Like that’s a lot of stuff while trying to get through, you know, learning all the processes internally for the new company. Also at the same time, having my own sort of business that’s going on at the same time for the company. Um, but that’s going to settle down. It’s slowly settling down of story, you know, starting to get the hang of it and but it’s exciting. I think it’s exciting. A new chapter, you know, you are so used to doing your thing for I mean I did on my own for besides, you know, I’ve been on my own for 20 years on which is kind of fun Now, I haven’t worked for somebody for 20 years. And so that’s kind of a change of pace. 

Greg Alexander [00:14:13] What’s it like having a boss? 

Bart Mroz [00:14:15] I have to. It’s great. Oh, well, believe it or not, I am. I am a happy camper. I have good people above me, good people working with me. And this is kind of funny, but I have no on working for me. Weirdly, I’m okay with that for the moment and not that like our team members were not. They’re great. They’re great people. It’s awesome. Just a just a breath. Taking a breath, I guess, is a good thing. 

Greg Alexander [00:14:42] Yeah. Awesome. All right, listen, we’re at our window here, but congrats to you and your team. I’m really happy for you. I can tell by listening to you and looking at you how happy you are. So that makes me feel great. So congratulations, man. 

Bart Mroz [00:14:57] Thank you so much, Greg. 

Greg Alexander [00:14:58] All right. All right. A few calls. Action for those that are listening. So if you’re a member and look for the meeting, invite for a board session with us, or you could be able to ask some questions to him directly. If you’re not a member, you want to become a member, go to the website and collected 54 and hit apply and we’ll get in touch with you. If you just want to learn more, check out the book The Boutique How to Start Scaling Sell a professional services firm on Amazon. Okay, Thanks, everybody. We’ll talk to you next time.

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Episode 151 – Mastering the Exit: A Guide to Demystifying Due Diligence When Selling Your Business – Member Case by Jay Smith

Embarking on the journey of selling your firm can be as complex as it is exciting. In this session, we demystify the due diligence process, ensuring you navigate these critical waters with confidence. From legal audits to financial analysis to customer references and employee satisfaction reviews, we delve into the essential steps every seller should undertake to secure a transparent and advantageous deal.

TRANSCRIPT

Greg Alexander [00:00:10] Hi, everyone. This is Greg Alexander, the host of the Pro Serve podcast, brought to you by Collective 54, the first community dedicated to founders of small service firms who are trying to grow scale and maybe someday sell their firms. On today’s episode, we are continuing in a series and the series is around the mechanics of selling your firm. And we’ve been breaking down each of the individual items. And today we’re going to take a big bite into a juicy topic called due Diligence. And if you haven’t been through an exit before, you might think you know what due diligence is. But trust me, having been there and done that, you don’t it’s there’s a lot to it. And we have a fantastic member with us today. A collective 54 members name is Jay Smith. Jay’s wildlife, Well-liked, well respected. He’s been with us for a long time. He successfully exit his firm Security seven and went through due diligence and he’s lived to tell about it. So he’s going to share some of his wisdom with us today. So, Jase, good to see you. Thanks for being here. 

Jay Smith [00:01:21] Great, Great being here. Greg, Thanks again for allowing me to pontificate here about something that we were so passionate about maybe just 14 months ago. Yeah. 

Greg Alexander [00:01:30] So why don’t we start with the very basic first question, which is, you know, what is due diligence and when does it start and when does it end? 

Jay Smith [00:01:40] So I probably have two answers to the due diligence. Start and stop. I think technically most people would consider due diligence to start right after a signed letter of intent between the buyer and the seller. It probably is for most people’s timeline. At the conclusion of the the deal when you sign your security purchase agreement. From my perspective, though, we hired an investment banker and there was a due diligence prep which felt like due diligence at the time, going through it for the first time where we were, you know, pretty much interrogated by our investment banker on what our financials had in it in some of the stories behind it. And then, you know, from the from the end of that time period, I really felt like due diligence still still on, you know, continued to go after the security purchase agreement into the time when networking capitals were kind of all taken care of as well as escrow amounts were all taken care of. Right? So there was another period of diligence that happened after the after the close. So, you know, my my experience was I looked at it from an elongated standpoint because I was still being tested by a third party. But I think most people would consider it, you know, just after allowing just its signing of a security purchase agreement. 

Greg Alexander [00:02:54] I love your definition. So before the banker gets hired, the banker scrubbing you that as a form of due diligence and there’s a traditional sense, you know, between lie and close and then you know if there are some contingencies on the deal, you know, escrow it, whatever it is, it continues after the transaction. So that’s that’s a really good way of framing that up. So, Jay, in your case, you know, if you were to think back on it, how many months the you know, from start to finish, did that last. 

Jay Smith [00:03:22] We heard our investment banker till end of December of 21 and we finished up our agreement, you know, the signed security purchase agreement on 831. So probably probably a good strong eight months. And then after that, you know, escrow lasted, you know, two chunks, 12 months afterwards. Yeah. So you’re probably looking at maybe 24 ish or so months. Kind of tip the tail. 

Greg Alexander [00:03:52] Yeah, it can be a beast. So what are, you know, and maybe keep in mind that our audience of people that haven’t been through an exit before, so maybe a one on one answer here is suffice. What are the basic components of due diligence? 

Jay Smith [00:04:09] There were it was probably the the finance side was first. And I think from what I’ve learned is finance was first because it’s the least costly. And if the finance mechanics don’t make sense, then they’ll never get to the more costly phase, which is the legal side of it. So there was a financial side for sure. There was the legal side, and then there was, you know, customer satisfaction and employee satisfaction was something that was big with the the buying firm for us. So those were probably the major buckets. Each one of those buckets had various team members and there was cross-pollination of teams. So the legal folks had 14 members. Our legal team had four. You know, our investment banker had three. Our finance team had two. So, you know, and then there was cross-pollination of teams. Our CPA was talking to the tax lawyer. You. Yeah. You know. 

Greg Alexander [00:05:05] Let’s let’s break down each of these components for finance, legal customer set, employee set. So what what was in the finance bucket. 

Jay Smith [00:05:15] From a from a finance bucket. Obviously all your stuff, you know probably 3 or 5 years I think they were looking back forecast was was a pretty strong component of it. They are looking at any tax returns that you’ve got, both federal and state, various state levels. From our perspective, we’re a managed security service provider. We had a rental practice and a resale practice, maybe not like some of the other members, but there was tax and nexus considerations is part of ours. In the legal bucket. They were looking at anything that we’ve ever signed, any vendor contracts or any client contracts. They’re looking for a sign ability, which we made sure that we had in our contracts, that there was a majority share of our company that was sold that we could assign without written permission from our client. So that was something big, you know, is very transferable. Is it? Is it? Let’s see. The deal structure was something that was in the legal bucket for sure. There was various ways that we could have transacted the business, but it was a share purchase or an asset purchase. It was kind of a combination of both. So there was a share purchase, but we end up making a holding company which made the transaction legally a little bit more complicated, but it kind of took the best of each one of those. You know, buyer didn’t have significant backward looking ramifications and there was some tax breaks for doing it as well. 

Greg Alexander [00:06:52] And what was in the customer bucket? In the education? In the employee bucket? Excuse me. 

Jay Smith [00:06:56] Yeah, sorry, I forgot those two, But from a customer perspective, they started sending surveys out to our clients that were just a customer satisfaction or rating service from the employee side, probably pretty similarly. And the employee side also had some interviews of some key employees towards the tail end of the transaction, right? So we were hesitant to to show our employees, you know, that we were going to be transacting until we were reasonably convinced that this was going to happen. We segmented out some employees from others. You know, some of the some of the I would call the top performers, but some of the ones that were going to be more coveted, possibly in the new organization are going to be interviewed, you know, very old status, you know, kind of an above. But there were you know, it was it was a fair amount of diligence. And it’s, you know, as an owner, it’s very, very uncomfortable the whole day. Right now, you’re you know, you’re showing your cards. Yeah. And there’s a there were questions, you know, from you know, I have to partners and there were question marks about the timing of when you show which cards you know buyers encouraging all accounts to be showed or I’m sorry the seller I’m sorry the virus encouraging all cards to be shown and we didn’t want to show them all. I particularly didn’t want to show them all in due time. So there was some at wrestling matches, but there was some postponement of certain interviews in certain times. 

Greg Alexander [00:08:28] Okay. And let’s talk about the players involved and we can stay with this kind of for budget structure. So on the finance side, who was involved from your end and then who was involved from the buyers and. 

Jay Smith [00:08:42] From our end, we outsourced finance. We’re a 40 person firm. So, you know, we didn’t have as much in-house as we did, you know, outside. So our CPA was involved who was, you know, kind of in a controller role. Controller role. We had outsourced finance that worked for him. Unfortunately, they gave notice right during the transaction in July of the transaction. So that, you know, had a level of additional. You know, it complicated things. Additionally, I was involved in the finance element of it. You know, my the my partners and I agree that I was going to take prime on the transaction. They were going to continue to work in the business. I was going to work on the business. So that, you know, you still want the business to be going in moving forward as you’re trying to transact. So that put a lot of pressure on, you know, what tasks do you want to be doing from the from the acquiring organization? They had all of their know, their accounting firm completely engaged. And then they had some people on inside their firm. So it was outside the and inside doing diligence on, you know, our financials. Those firms were much larger than our firms were in their firm was much larger than ours was. So it’s almost sometimes like you’re getting hit a little bit by a mack truck. You know, the requests coming in are significant. And we didn’t know how, you know, we didn’t have institutionally all the KPI data that they were looking for. So we’re trying to scurry to, you know, create it, you know, best we could. Yeah. And they realized it, but they still, you know, you want what you want. You know, you got a checklist item that you need to check. Yeah. 

Greg Alexander [00:10:20] And how about on the legal side? Who was involved from your perspective and from their perspective? 

Jay Smith [00:10:24] Yeah. So they had they had a deal lead on their side. They were pretty significantly involved. And then we had three lawyers, actually four lawyers involved, get a tax lawyer that did a cameo. And then we had, you know, the the prime lawyer, you know, his second chair, and then a pretty distant third chair. So, you know, costs that were involved were significant. And, you know, the the pricing took only the most, you know, most challenging parts. But spots where we had the most visibility, most liability to it. And then, you know, more of the grunt work was done by the third chair and kind of everything in between. From their side, they had you know, they had their legal firm much larger than ours as well. So, you know, there were some you know, there was some requests made. The deal size or ideal team was only so large they could handle so much at once that we did have a pretty good benefit from, you know, from the acquirer in that this was we’re part of a roll up and part of a platform play. So we were bolt on and they had gone through these contracts previously with a number of different organizations. So a lot of the wrinkles that we might have seen have already got ironed out because other owners, you know, former owners had sold their organization. So they you know, what we got was a pretty good base to start with. So it wasn’t, you know, wrestling over every single legal sentence. 

Greg Alexander [00:11:49] Got it. And then regarding the customer diligence and the employee diligence, who was involved there? 

Jay Smith [00:11:57] That was mostly the acquiring firm. They reached out. They got a list of some of our top, you know, accounts, top 20 accounts. They put a survey together. They reached out directly. And then they followed up with some conversation to have some interviews. None of this was in the guise that the firm was being acquired. This was all when, you know, we hired our customer satisfaction team in what we were doing. 

Greg Alexander [00:12:25] Yep. And did all this take place virtually, or were these people camped out at your offices? 

Jay Smith [00:12:33] Most of it was done virtually. So this was all like, you know, during Covid time, you know, Covid was probably winding down, but it was still all done virtually. There was a concept of a virtual data room where there were there was the front lobby maybe of the data room, and then there’s the back office part of the data room. So we were uploading everything into the back office first. Our investment banker would scrub it and then they would put it into the into the front lobby for, you know, the acquiring organization to see, you know, scrubbed, you know, scrubbed information, make sure that we didn’t say or do something that was incorrect. Yeah. Really important to understand that the investment banker was part of every single conversation, that they were really up to their eyeballs in it. Not to say that the other two organizations weren’t. But the investment banker was was absolutely critical in this. Can’t can’t recognize you know, can’t recognize them highly enough. Yeah. 

Greg Alexander [00:13:32] Especially, you know, as a small firm like yours, it’s going to be a bolt on. And you’ve never been through an exit before. I mean, if you just think about the way you described this, you know, if I was use a sports analogy, you know, here you are high school football team playing against University of Alabama. Right? I mean, it was like like it could be overwhelming. I could see very, very, very quickly. And that’s why having somebody an M&A advisor, investment banker to marshal you through the process is so incredibly important. 

Jay Smith [00:14:00] All right. Know, Greg, another important point. The investment banker there, a part time psychotherapist as well. You know, deal fatigue for me. You know, I actually broke down a couple of times with just flat out exhaustion and I just couldn’t handle putting together one more redo of a spreadsheet. So, you know, these people go through this every single day. So having somebody in your corner that’s going to get you a $10 co-pay, actually, the co-pay was far more expensive, but $10 worth of it. Yeah. 

Greg Alexander [00:14:33] Jamie, last question for you on this. And this has been very helpful to kind of mechanically break down this concept, do due diligence, and of course we’ll dive into much greater detail when we have the member session. But any any mistakes that you advise people to avoid? 

Jay Smith [00:14:50] I think we were fortunate that we were able to mistakenly avoid it. But, you know, you really have to understand that this is a team selling concept. And I think as professional services organization, we probably understand that, that there’s maybe a creative person and maybe there’s a salesperson outside salesperson inside Salesforce. But you’ve got a team in place, a project coordinator. But this is this is team solving on steroids. You know, at least from my perspective, you’ve got your internal team, you know, your partners, your employees that are helping. You’ve got these investment bankers, you’ve got the lawyers, you’ve got the. 

Greg Alexander [00:15:26] CPA. 

Jay Smith [00:15:27] People, CPA. This is well coordinated. And, you know, and then the team expands into the acquiring organization and then they’re sort of professionals. So, you know, it gets it gets pretty splattered where the lawyers are working with the lawyers in the accountants are working with the accountants, but then the accountants are working with you and they’re working with the lawyers and they’re working with their lawyers. Yeah. So trying to manage a team. We were fortunate that the investment banker was new to us, but the other two people had been with us and had the chance to be able to handle the deal. So, you know, we were fortunate that we trusted two of the three arms and that everybody worked really, really well together. Yeah. 

Greg Alexander [00:16:09] All right. What I would add here is that sometimes first time founders and I was one and had made this mistake myself, we think the deal is done and you get an alloy. That’s the starting line, not the face, the finish line. And you’ve got to be able to make it through diligence and a lot of deals, 50% of them is the estimate fall apart post alloy because the firm that’s being bought can’t make it through diligence and it’s hard and there’s a lot to it. And you know, the good news is, is that if you put together the right team, as Jay did, you can make it through it and the effort is worth it because it’s life transforming, you know, when the deal actually happens. But just, you know, go into this members with your eyes wide open. It’s hard to sell a firm and it’s especially hard to get through diligence. So, Jay, on behalf of the members here, really appreciate you walking us through this in the way that we did. This will open lots of people’s eyes and sometimes peeling the onion a few layers. This is important to understand what these concepts are, though. So thanks a bunch. 

Jay Smith [00:17:17] Thanks, Greg. Thanks for having me. 

Greg Alexander [00:17:18] Okay. All right. Just a couple of things here before we leave. So first, if you’re a member and you want to ask questions directly, look for the meeting. Invite for a private one hour Q&A with him. That’s coming shortly. If you’re not a member, but you think you might want to be, go to collective 54.com and fill out an application will get in contact with you. And if you just want to learn more about topics like this, check out my book, The Boutique How to Start Scale and Sell a professional services firm, which you can find on Amazon. But until next time, I wish you the best of luck as you try to grow scale and exit your firm.

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Merging vs. Selling: 10 Roadblocks Founders Face when Exiting

Merging vs. Selling: 10 Roadblocks Founders Face when Exiting

Play Video

Are you on the brink of a successful exit but can’t get over the hump? Merging with another firm may be your best exit strategy.

This video dissects 10 roadblocks founders face when exiting and demonstrates how merging with another business could help alleviate some of those challenges.

In this video, you’ll learn:
– 10 roadblocks founders face when exiting
– How merging with another business can help you achieve a successful exit
– How to analyze the best options for your firm

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Tax Implications for Boutique Professional Service Firms During Acquisitions

Tax Implications for Boutique Professional Service Firms During Acquisitions

Acquiring or merging with other businesses is a strategic decision that requires careful financial and tax planning. For boutique professional service firms, the tax implications can be particularly nuanced given the nature of the assets and client relationships involved. In this article, we will delve into the tax treatment for three forms of acquisition often used in the professional services industry: asset purchase, equity acquisition, and mergers.

    1. Asset Purchase

Definition: In an asset purchase, the buyer acquires specific assets and potentially some liabilities of the selling business rather than its stock or business entity.

Tax Implications: In an asset purchase, the buyer gets a step-up in the tax basis of the acquired assets to their fair market value. This often results in higher future depreciation and amortization deductions for the buyer. Sellers, on the other hand, pay tax on the difference between the selling price of the assets and their tax basis, which could lead to capital gains or ordinary income, depending on the nature of the asset.

Illustrative Example: Imagine a managed service provider, MSP LLC, with assets valued at $1 million but a tax basis of $600,000. If another firm, Tech Ltd., buys these assets for $1.2 million, MSP LLC will pay taxes on the $600,000 gain ($1.2 million – $600,000). Tech Ltd., meanwhile, will now have a new tax basis of $1.2 million for the acquired assets.

    1. Equity Acquisition

Definition: In an equity acquisition, the buyer acquires the stock or the interest of the target firm, thus acquiring all its assets, liabilities, and potential undisclosed issues.

Tax Implications: The buying entity does not get a step-up in the basis of the acquired assets, and the target firm’s tax attributes (like net operating losses) may be limited in their usability. Sellers often prefer this method because the gains are usually treated as capital gains, which are taxed at a lower rate than ordinary income.

Illustrative Example: Consider a software development firm, SoftDev Inc., with a total stock value of $2 million. If another company, Code Masters, decides to buy all the stock for $2.5 million, the shareholders of SoftDev Inc. would pay capital gains tax on the $500,000 gain.

    1. Mergers

Definition: A merger is the fusion of two entities into a single entity. The three types of mergers are:

    • Direct Merger: The target firm merges into the buying firm.
    • Forward Merger: The buying firm merges into a subsidiary of the target firm.
    • Reverse Merger: The target firm merges into a subsidiary of the buying firm.

Tax Implications: Mergers can be structured to be tax-free if specific requirements are met, especially if they are considered a reorganization under the tax code. If not, they can have similar tax implications to an asset or equity sale.

Illustrative Example: A sustainability consulting firm, GreenAdvisors, merges with EcoConsultants in a forward merger. GreenAdvisors becomes a wholly-owned subsidiary of EcoConsultants. If structured correctly under the tax code’s reorganization provisions, this merger could potentially be tax-free. Otherwise, the tax implications for asset or equity sales may apply.

Decision Tool:

To decide the right acquisition structure when selling, consider:

    • Tax Impact: How will each structure affect your tax liabilities? Would you prefer capital gains over ordinary income?
    • Liabilities: Are there potential undisclosed liabilities or issues in the target firm? An asset purchase can help the buyer avoid these.
    • Strategic Fit: How do the companies fit together? A merger might be the right choice if both entities have complementary strengths and client bases.

In conclusion, understanding the tax implications of different acquisition structures is crucial for boutique professional service firms. Consulting with a tax professional before making any decisions is always recommended.

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