When looking to sell your firm, failing to prepare could result in you missing great opportunities when they’re right in front of you.
In 2022 – a year of record consolidation in the AEC industry – we were all party to the strong demand for buying architecture, engineering, and consulting firms. There are a number of reasons we’ve seen this unfold over the last couple of years, but one is that this space continues to endear suitors with its relative stability and potential for strong returns. As director of ownership transition, I field several inquiries each month from smaller firm owners looking at the predicament of ownership transition. Many are coming to the table because they have a key person or two they want to include in securing the firm’s future. Others are looking for counsel because they have an idea of an internal transition plan but have been approached by a buyer and are reacting to the prompt.
In today’s environment, buyers of AEC firms take a range of forms; from key qualified staff, to another consulting firm you’ve worked with for a long time, to a cold call inquiry, to those who have reached out specifically because they know something about your firm. In any instance, as a potential seller you have a number of decisions to make. Do you have the right folks in the business to complete an internal transition or support an external transition? Does selling to an outside buyer provide your team more opportunity for growth? What are your overall goals and how do you navigate the market to achieve them? This can be a delicate time!
According to Zweig Group research, roughly 80 percent of firms state they have some kind of training or program that focuses on succession planning, but only 17 percent have a formal ownership transition program. It’s important to note that most AEC firms are (or should be!) in some state of transition. It’s also important to note that sending mixed signals to some of your key people can be really disruptive and degrade value. Setting up conversations with internal staff and key leaders who could be candidates to take over the firm has to be done carefully and takes time. Education and awareness is one of the biggest blind spots for smaller firms that haven’t gone through a transition before. Another is that some firm owners don’t realize how delicate these conversations can be if they aren’t approached carefully. Many incoming owners see ownership as an all or nothing proposition, and a false start can prompt them to start dusting off their resume.
By focusing on succession planning well in advance of answering and responding to a call to sell your business, you are ensuring you have a solid base of options. But if you do get the itch to answer an email or a call regarding the sale of your business, just know that setting up meetings and exchanging information with external buyers requires patience, diligence, and – perhaps most importantly – a cool head. As a seller, you are now in a seat that requires you to respond to offers (with some sense of urgency) from external buyers. If you have other partners and next tier leaders, you are also likely contemplating internal ownership offers to them. This can be overwhelming! Unfortunately we see firms that are unprepared for the range of conversations that need to take place and miss great opportunities when they are right in front of them.
If you find yourself pursuing an external sale of your business, keep a few things in mind:
- Make sure your financials are clean and can be analyzed in industry context. Ensure your finance department (staff and systems) is tuned to be able to develop accurate reports on a timely basis. Understand that quality and consistency with your financials drive value and rapport down the line.
- Don’t be offended by an initial offer that “seems low.” It’s a draft of something that takes time to shape. Negotiations are based on differences of opinion on value and other key terms. If it feels like a good fit, don’t let a lowish offer shut the conversation down. Find a few points that align with your goals and communicate those areas of alignment. Valuation is one thing, but risk sharing and deal structure really drive the amount you take home.
- Know when to walk away. Many firms get caught in the dizzying activity of trying to sell externally and neglect the internal options. If the external market is responding in a way that doesn’t fit your expectations, be able to shift focus and build the necessary programs to grow your key folks so that option can become a reality.
Sellers have the ability to respond to multiple offers. Some buyers start low. Don’t be offended. Remember it’s a negotiation. Know what you want. And if you intend to retire or cash in on your value, know what you need and work the problem so you can accomplish your goals. This requires planning and patience.
Will Swearingen is a principal and director of ownership transition advisory services at Zweig Group. He can be reached at wswearingen@zweiggroup.com.
