Ten Reasons Firms Are Bought

The reasons a buyer might want your firm, and the reasons you might want to sell it, don’t always overlap all that much, and there are times when you should be careful in how you describe why you’re even considering selling your firm, but we’ll get to that later in the article. For now, just recognize that your reasons for selling may need to be “coded.”

You might be surprised, though, at all the motivations that different buyers might bring to their search, and it’s good to understand each of them. It’ll help you aim for a more sellable firm, look for unexpected opportunities, and then guide your M&A advisor in using that leverage on your behalf during negotiations for a successful exit.

The Ten

Not appearing in any particular order, these ten reasons will cover at least 95% of all transactions. These are described from the vantage point of the buyer:

1. Vertical Integration. This is effectively purchasing a discrete service to add to other discrete services that a particular vertical might want to buy together. You’re creating a “more full service” firm that’s positioned vertically. Say a dev shop wants to build out a strong UX research arm to front that work. They might buy that firm instead of build it, which means they’ll have an existing culture that’s primed to work together, as well as clients to offset the purchase price.
2. Horizontal Integration. Here you are either buying a competitor that offers the same services to a different vertical…or purchasing access to a market that needs the same thing you are already providing to that market. It’s a way to expand a tight service offering to other verticals, usually. In that first case, maybe you are a full-service firm that sets up CMS instances for mid-sized architectural firms. Your firm is bumping its head against market share issues (often around 1-2%), and you realize that doing the same thing for engineering firms is nicely adjacent, and so you buy a firm with an established beachhead in that new market.
3. Solve a Client Concentration Issue. You work for three different divisions of a large F5000 client, but those three sources of work still represent 43% of your billings, and you recognize that when you lose one division, you’ll almost certainly lose all of them at once (you should realize that, anyway). Everybody on the management team knows that new business should be more front and center, but your biggest client, and the other ones on the roster, are keeping you as busy as you can be and it just never happens. So you begin thinking about another solution, and that’s to buy a firm, which will mean that now your largest client is a smaller percentage of the whole. Heck, it might even happen that the seller has the same problem, and this will somewhat solve both of your issues in one fell swoop.
4. Profit/EBITDA Grab. This would be particularly meaningful if some outside party (lender, investor, etc.) is pressuring you to fix something, particularly in a fast growth environment. Your firm has a solid growth story at the topline, but not so much on the bottom line. You need some EBITDA to pacify a lender or investor or both, and your current strategy is oriented more around growing market share, assuming you’ll turn up the profit equation later. This one will give the seller quite a bit of leverage because the healthy profit will be directly related to the multiple, and funding the purchase is usually not the usual challenge in a sale.
5. Smooth Out Growth Curve. This is distinct from the above because it focuses on the topline and not the bottom line. If for some reason the “financial story” that the acquirer wants to tell requires a steady upward movement, an acquisition might paste over any down years that a firm sees coming. We saw some of this during the pandemic. The slowdown that the acquirer is trying to fix might reflect a struggle in the quest for new business, or it might be just an innocent higher investment in the firm that won’t pay off until later, but they would rather not explain a down year, especially if it’s a recent one where the weighting is likely to be more of a penalty on their own valuation.
6. Intellectual Property. This is more likely to happen if the IP income/expense has been tracked carefully and you, the buyer, have access to market this broadly. As a buyer, you are usually solving the distribution/marketing problem. It could be a research methodology or a performance dashboard or an algorithm of some type. The purchase might be an exclusive one, but it will always include a commercial use of the IP.
7. Increased Geographic Footprint. This could be for customers, but it’s often for employee recruitment. It may also be driven by perceived affiliation: Chicago: packaging; California: organic food; Houston: energy; Nashville: healthcare; Silicon Valley: startups; Penn/NY: biotech; northern Indiana: orthopedics; and so on. Keep in mind, too, that these purchases can cross international borders. We do a lot of work across continents.
8. Subsequent Succession: You’ve long eyed an internal transfer, but there’s no one on your team with that entrepreneurial outlook, whereas a younger person running another firm might just be that best option. So you purchase that firm, smaller or bigger than yours, and the nature of the transaction determines whether it’ll be publicized as an acquisition or a merger. What everyone in the know realizes, though, is that one of you is older than the other and will move on first, and now there’s a more likely succession plan…and a great partnership until that needs to happen.
9. Cross-Selling. Both firms, buyer and seller, are connected at the C-level to the right buyers, so why not sell them more things? Unlike other motivations, here you don’t care too much what they do for those clients and how profitable they are isn’t front and center like it usually is, either. What you’re angling for is the right level of access to decision makers who would also be candidates for what you do. One of the examples I provided in the newest book (Selling Your Professional Service Firm: A Primer) is an executive coaching firm that wants to get into executive recruitment: it’s the same people they are trying to reach.
10. Acquihire. For the seller, this will only be better than walking away, and so sometimes the most difficult thing about a search for a suitable target is breaking the news that it’s better than walking away from their firm, but not as lucrative as a traditional acquisition. But it’s essentially extending a lifeline to a distressed firm (usually new biz failures) that they haven’t been able to solve. Their leverage is a team that works together and enough work to lessen the risk.

Bonus: Flipping This

There are many reasons to SELL a firm that do not appear on this list. Keep those to yourself, but you mask them with the age-old phrase that sounds like this: “I’ve yearned to play on a bigger stage”.

The truth is, though, that you may still be very engaged in running your firm, and the idea of doing it “less by yourself” is very appealing. Which leads to this very important point: the best time to explore selling your firm is when your back is NOT up against the wall, you have energy/engagement left, and at least one of these ten reasons above might apply.Let us know if we can help!