Important Considerations for Selling Your A/E Firm
Janaury 6, 2021
As an architecture or engineering (A/E) firm owner, you work hard to grow the value of your company and deserve to benefit from that work whenever you’re ready. The intense stressors (both professional and personal) of 2020 have led many principals to feel that the time is now… or at least, soon.
But it’s important to keep in mind that going into “selling mode” without forethought and careful planning can mean anything from a lower sale price to the inability to attract a buyer at all. Or, to put a more positive spin on it, proper preparation for a sale can help ensure you get maximum value for your firm.
"It's essential that you be proactive and prepared regarding the possibility of selling your firm."
Ready to Sell? Take These Steps Before You Do!
By taking these four self-examination and business-improvement steps, you greatly increase your chances of getting the value you’ve worked so diligently to create out of your business.
- Clean up your books
Using the right software tools can help in this area, but that may not be enough. For accounting staff who’ve been immersed in your financials for months, years, or decades, it can be a case of not being able “to see the forest for the trees.” This isn’t a criticism of their skill or dedication—it’s just the fact that it’s hard to see the big picture when you’re focused on the details.
For this reason, it’s crucial to get an outside perspective. If you provide potential buyers with financial information that isn’t clean, clear, and concise, that’s a major red flag and can cause them to pass on the purchase. You’ll have to “spend money to make money” by bringing in third-party experts, but the payoff will be worth the investment.
- Take an objective look in the mirror and ponder your future
In most cases, owners are contractually obligated to stay on as employees of the firm they previously owned for a specified time period. This arrangement can be challenging for principals who haven’t had a boss (because they’ve been the boss) for many years. And the culture shock can be especially powerful since often the company acquiring the small firm is a larger one that, by necessity, has more structure, more rules, and more requirements for how business is done—everything from interacting with clients to filling out timesheets.
So, are you really mentally and emotionally prepared for that kind of operational whiplash? If you aren’t, maybe you’re not ready to sell.
- Engage key employees as early in the process as possible
This is, of course, situation-dependent advice. In some cases, engaging employees early may not be possible or prudent. But generally speaking, you want to do everything you can to reassure and retain your most experienced staff, since the firm’s value is based, in part, on their expertise and the impact it has on landing new clients and holding on to existing ones. You also want to engage employees as soon as possible so the buyer sees that you understand the importance of employee retention.
If your buyer is a bigger firm, it’s particularly important to talk with team members who may have had bad experiences with large firms in the past. You want them to know that their concerns are recognized and that you’ll do all you can to address them with the new owner. You can set the stage for these conversations with staff by creating a culture of openness and financial transparency before you even start to pursue a sale. This will enable key employees to understand the business drivers behind both your decision to sell (including that it will help strengthen and/or grow your firm) and a new owner’s processes and procedures.
- Assess the situation of your clients
Many (if not most) small firms tend to market themselves as “just as good as bigger firms, but with less red tape and fewer hassles.” If you do, that can come back to bite you if the company buying yours is one of the “bigger firms.” While you can’t go back in time and change your marketing strategy, you can acknowledge it to your clients and emphasize why this acquisition is a good thing and will benefit them.
And, if you’re starting to consider an exit that will take place down the road, you may want to shift away from the “David vs. Goliath” narrative today. In addition to giving your clients concerns, this type of strategy can give potential buyers indigestion. For one thing, it can make them think your key selling point wasn’t the quality of your work but rather the size of your firm. Also, nobody wants to walk into an environment where they’ve historically been painted as the “bad guys.”
Be Proactive and Prepared
It’s been our experience that virtually every firm has one or more of the four points above that they need to address. It’s essential that you be proactive and prepared regarding the possibility of selling your firm.
As they say, “You never get a second chance to make a first impression.” If your ideal buyer doesn’t like what they see in your financials, they won’t make an offer now and probably won’t consider making one in the future. And, keep in mind that your ideal buyer may approach you before you even officially put up (however discreetly) the “for sale” sign. In other words, you need to be ready to sell even before you’re ready to sell, just in case.
And, a caution: QuickBooks is a good accounting system. But if it’s the only financial tool you use, you aren’t ready to sell your firm. In order to provide interested buyers with the metrics they need to really understand your firm’s revenue potential, you’ve got to have a true financial and project management system that enables you to accurately track (and, as a result, influence) key performance indicators (KPIs). For example, Factor AE was built with AE-industry KPIs in mind.
Buyers don’t want to simply know that you’re profitable, they want to know why you’re profitable. If you’ve had good financial results in recent years, was that because of your efforts or simply a result of a booming economy? The former makes your firm more valuable, the latter much less so. But if your work is why you’ve been successful and you can help the buyer make that determination, they’re much more likely to continue the conversations that ultimately lead to a profitable sale for you.
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