How Sellable Is Your Firm?

There are a lot of edge cases that are successfully sold, so let me be upfront about that right away. But the further away you are from an edge case, the more probable the successful sale will be.

The Unusual

For some examples across the ca. 200 equity transactions we’ve led, here are some that were successful:

• 100% down with no earnout.
• Client concentration of >80%.
• Sold to client, with buyer even knowing all other clients would then leave.
• Internal transfer when no bank would fund it and seller refused to carry the note.
• Zero recurring revenue.
• No profit.
• Sudden death of (young) owner and no partners.

But these are edge cases, okay? I mention them because anything is possible if you have good advisors (ahem) and some luck, but they are edge cases and success is less likely.

The Norm

The easiest way to capture the norm is to give you a preview of a conversation that we might have with you. Jonathan runs our M&A Practice, and your first call is likely to be with him unless it’s an internal transfer, merger, or partnership issue, in which case I’ll take it since I manage those.

You’ll likely have completed a form on our site or been introduced to us via email from someone we both know. Between us, we’ll have 6-12 conversations like this every week.

After we get to know you a little bit, we’ll ask these kinds of questions:

• How big is your firm (number of people)? Total revenue is more important than number of people, but it’s a question a buyer will always ask, so we need to get that answer.
• Where are they working from? Here we’re looking for what percentage of your workforce is remote, and even what countries they might be in. Buyers will always want to know that early on.
• How many partners and what are the rough ownership percentages? The fewer the partners, the easier it is to build consensus, but the more partners there are, the easier it is to construct different earnout arrangements.
• What’s your topline revenue? Buyers are acquiring profit, which is something you’ve already achieved, but they’re also buying revenue, which they can sometimes impact with a better profit result.
• What’s your profit percentage? In our minds, we might then add a few percentage points because sellers don’t typically have a handle on their EBITDA, which is sometimes higher than their profit. We’ll do a quick calculation, multiplying that derived percentage against topline revenue to get a fixed number. We’re not just interested in percentage, here, but whether or not the resulting EBITDA crosses certain boundaries. If it’s above $1mm, for example, it’ll allow a higher multiple.
• What do the last few years look like? We need to know about how we’re going to craft the narrative…and maybe whether we need to fix something before we go to market.
• Have you had a valuation done? We always want this answer to be “no” because it’s the first thing we want to do. We’ll never use someone else’s valuation, but we will want to see it if you have had one done. We can only defend our own, and it’s a very deep, very proprietary process.
• What are your expectations in a sale price? And percentage of that in cash at closing? We may talk you in and out of certain things, but if your expectations are unrealistic and you don’t listen to us, we’ll not likely take your case.
• When are you thinking of selling? Hopefully we’ve caught you early enough that we can plan this properly, but there’s no bad answer. It could be “now” or it could be “in five years.” While on this discussion point, we’ll remind the seller that their engagement level needs to extend from now through the sale, but also beyond the sale through an earnout.
• What kind of a buyer are you looking for? We’re going to take on the task of finding a buyer, but we just want to listen to you. Are you open to a PE buyer (note: you always should be)? Is it a platform play? A strategic acquisition? Roll-up? It’s good to go into a sell-side process with a hypothesis, but know that the ideal buyer profile can be a moving target as you get more information.
• How are you feeling about the next stage after the transaction boundary? We need to know if you are just “full up” and done, excited about playing on a bigger stage, or even if an “earnout” is a “sentence” in your mind.
• How essential are you to the daily running of the firm? What’s the management team under you look like?
• Tell me about the relative size of your largest clients? Ideally your largest would be <25%, and the calculation rolls up all related clients into one. In other words, multiple divisions of the same publicly-traded company are considered one client.
• How much of your revenue is recurring vs. project revenue? We honestly don’t care, but buyers often do. If it’s not a good story, we can suggest ways to tell this story effectively.
• How tight is your positioning, and does your current website reflect that? This is going to influence how we go to market.
• How do you land new clients? How does opportunity get dropped into the top of the funnel? Buyers do not want to hear something like this: “Oh, we actually have thrived without a marketing plan. We have consistently gotten amazing referrals.”

Now, we may not ask all these questions in the first call. What we’re essentially doing, though, is interviewing you to see what you’ll be like to work with and the degree to which we can be successful on your behalf. If we don’t actually sell your firm, it’s going to disappoint us, too.

What’s Next

If this has piqued your interest and you want to talk about it, please reach out and we’ll get on the phone.

But if “what’s next” refers to what happens next in this story, we’ll point you to our website and walk through all the fees (which we are transparent about), answer any questions you have, and send you the paperwork.

That kicks off a $5k valuation, first. Then several weeks of putting together a CIM (Confidential Information Memorandum). This process involves a lot of back and forth, though we’ll lead it. This is the document that a potential buyer receives after they sign an NDA.

Then there are lots of meetings, (hopefully) multiple LOIs, due diligence, and a party where you sign the purchase agreement.

Oh… and then you get to sneak “Exited” into that line of your LinkedIn profile.