Early Onset Indifference

If you’re interested in one day selling the firm you’ve created and built, how do you know when you’ve maximized your potential and thus the likelihood of success in finding a buyer? If you aren’t ready to sell, how do you know what you should be working on? 

The M&A process can feel like a black box. It’s something most owners only go through once, so it’s not worth an over-investment of time on your part. However, having a basic understanding of what makes a firm “sellable” will make you a stronger decision maker and give you more confidence as you build toward an eventual exit.

But having said that, selling your firm rarely follows your plan. Instead, it’s about being sort of ready, listening differently to the options that might surface, and then jumping on the fortuitous opportunity that often just comes out of nowhere.

That “early onset indifference” is what often drives an openness to something different. In the past, it was almost always driven by being tired of clients. Nowadays it’s just as likely to stem from dealing with issues on your team, the fact that a different career is calling, you’ve not been able to turn the corner on your profitability or a sustainable new business effort, and so on. Most people in this field really love what they do, but be honest with yourself if your own engagement is waning.

There are still some timing issues that we can talk about, though, and so that’s what this article is about: the tricky timing of a sale.

A Very Wide Range

If we’re going to be honest, this process can begin unexpectedly and earnestly in just one day if you get hit by a bus. Fortunately, that’s very rare. But if you don’t want your life partner digging you out of the grave and killing you again in anger, make sure all the details are buttoned up. Document all the company passwords in a central place, have a No. 2 that you trust in place, make your wishes known while you’re still somewhat lucid, and have a loose, existing relationship with an M&A advisor who can guide a successful transition that maximizes the asset you’ve built in the interest of the people you’re leaving behind. That’s the one-day scenario.

The next scenario takes 3–6 months: Winding your firm down in an orderly dissolution because you’re just done, you haven’t been able to find a buyer, or you got a less-than-ideal offer but you can’t stay engaged even for a short earnout. This is also very rare, thankfully, but it still happens. I know of three firms that this year alone.

The next longest period is the 4–11 months required to handle a transaction start to finish. It’s unrealistic to assume that any great sale will require less than 4 months, but if it hasn’t happened in a year or so, it’s probably not going to happen—or shouldn’t happen, if that much negotiation is required. Of course, the earnout, whatever that is, needs to be added to that timetable, although no one can force you to stay. If you’re willing to leave some money on the table, you can always just say “adios” and walk out with a smile on your face and your laptop under your arm, fist-bumping the only people you’ve been honest with on your way to the parking lot.

The longest transaction interval is probably selling the firm to an internal buyer, and this is especially true if you carry the note yourself. In other words, they aren’t bringing outside money to the table, and so the sale is funded by the business you’re selling. If you don’t stay to shepherd that process forward, it might not remain healthy enough to actually complete the buyout.

Those are the four big categories and how time unfolds for each: from one day to four years.

Your Internal Clock

But aside from the actual transaction, how should you think about timing, especially when we’re talking about your own internal clock? Think of “losing your engagement” as the penultimate step. It’s the next-to-last step before the big, largely irreversible event that will almost certainly follow: You’ll close your firm, you’ll sell it, you’ll take a sabbatical (often just to reaffirm what you already know), or maybe you’ll fix whatever ails the firm so that your engagement rises again.

The salient point I’d like to make is this: Once your engagement begins to dip, quickly “arrest the descent,” as they say in flying, or you’re going to hit the ground. Here are some reasons for that:

  • Once your engagement wanes, it can quickly reach a tipping point after which there’s no recovery.
  • You don’t want to enter negotiations where you can’t bear the alternative: Saying “no” to the offer and pressing ahead with whatever energy you have left.
  • Maximizing the total sale will often require sufficient engagement to get through the earnout period, if there is one, and some of these are up to three years long, and others might be as short as a year or two. So you have to anticipate how fast your engagement is dripping away before there’s none left.

Other Timing Issues

There are other external timing issues besides your internal engagement level, too. I’ll just mention them briefly:

  • There are times when a bad year, especially if it’s unusual in your recent history, might need to roll off the valuation, or at least get slotted into a year where the relative weight is lower, to put some distance between the present and the past and maximize your exit value. Say your EBITDA has been 24% in the most recent year, 2% in the year before, and 18% three years back. If the valuation uses a weighted average of 3/6 for the most recent year, 2/6 for the middle year, and 1/6 for the first year, you really want that bad year to move from the middle slot to the earliest slot, as that’ll reduce the impact of that single year by a full one-half.
  • The most recent financial results will always be the most relevant ones, but there are also times when you need to prove to a buyer that your most recent results aren’t a strange aberration. Say your most recent EBITDA percentage is more than double what you’ve historically achieved. The buyer is going to wonder if your most recent results are the new normal … or some strange coincidence (almost always achieved on the back of a single client who became a client concentration challenge).
  • The M&A market ebbs and flows just like the stock markets do, and you have to weigh your needs against where you are in your own particular story as it plays out. Maybe you do need to swim against the tide, but it’ll take more effort and you may have to settle for a closer destination than you had originally imagined. Maybe you accept less, and move on to the next thing.
  • Trends in a particular industry can spring up in a matter of months. Look at what the pandemic did to the travel and tourism industry, or how AI is disrupting dozens of industries, or how an incoming administration might impact regulatory capture.
  • Finally, a client concentration issue (defined as one related source of revenue accounting for more than 25% of your revenue) can bring fast performance gains as well as unusual acquisition risks to the buyer.

But keep in mind that any timing issue that might be forcing your hand can also be used against you in the negotiations, so it’s quite a dance to think about the when and not just the what.

And when it’s all said and done, you may just need a little more time to find an alternative offer or two to bolster your negotiating position. A client in Austin came to us with an LOI that they were all ready to sign. They had just heard about us and asked us to take a look. We felt like it was a pretty bad offer, and we suggested that they should look around for something better. We found them two additional offers in our buyer pool. They didn’t end up going with either, but used the leverage to more than double the offer they had in hand.

These things take time. If the buyer is desperate to close on the transaction, use that against them. If you’re desperate to close, they’ll probably use that against you.

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