Thinking of Buying or Selling

Jan 19, 2004

While I can’t be bound by convention and from this point forward be forced into matching my weekly missive with the focus of other articles in The Zweig Letter, this week’s issue got me thinking about buying and selling— buying and selling businesses, of course. If I were buying an A/E or environmental firm or if I were trying to sell an A/E or environmental firm, here’s some of what I’d be thinking: With the market not being great, I probably won’t have to pay (or won’t get) as much as would have been the case in 1999, 2000, or the first part of 2001. The heady days of the last decade are over, at least temporarily (though the signs are we may be heading back soon). The crazy money just isn’t out there and buyers are not feeling as boisterous perhaps as they once were. All this means to me is the age-old valuation methodology of using the discounted future cash flow (DCF) model is probably more appropriate than ever. Purely financial buyers (are there really any of them in this industry?) will never pay as much as someone who sees synergy with their existing operations. Purely financial buyers probably won’t be much fun to work for, either. There’s no synergy with a purely financial buyer. Synergy is the only good reason to sell a business and the only good reason to buy one. When I talk about “synergy,” I am talking about you both need each other. I am saying it’s like any good marriage— the combined unit is stronger than the individual units. There are clients to share. There’s more and different talent to offer. Two plus two equals five. Maybe by “good,” I am really saying “noble.” But if there isn’t any noble cause, don’t you think that greatly increases the risk of the key people not staying on board post-transaction? I do. Trust is very important to me. Simply put, I won’t do business with anyone I don’t trust, no matter how good the money looks or how good the deal looks. And while I am (like most middle-aged men who grew up in the A/E business) a fairly trusting fellow, there are some people I cannot trust. I don’t trust anyone working on commission. I don’t trust anyone with too much jewelry. I don’t trust anyone who signs “MBA” after their name. I don’t trust anyone who has to tell me what Ivy League school they went to in the first three minutes of conversation. I don’t trust anyone who wears one of those horrific blue shirts with a white collar and cuffs (some kind of personal prejudice probably stemming from the sleazy character Gordon Gecko in the late ‘80s movie “Wall Street”!). No one buys a business and leaves it alone. If you are selling, expect the new owners to make a lot changes. If you are buying, expect that you will have to make a lot of changes. One of the great myths is that anyone who buys a company will leave things as they are. Things are not as they are once there are new owners. They cannot be. If the whole world waited until they had every problem in their present organization fixed before embarking on an acquisition odyssey, there would NEVER be another merger or acquisition in our industry. Likewise, if you feel your company has to be functioning absolutely perfectly in every way before you can sell it, forget ever selling it. Whether buying or selling, face up to the fact that you will be taking your eye off the ball that’s already in the air. That means you’ll probably see sales slow down or profits take a hit of some sort. Let’s face it, this whole process takes a lot of time and mental energy and it’s bound to show up as some sort of reduced performance in your current business— just what you don’t want if you are buying another firm, just what you don’t want if you are in the throes of a negotiation to sell your firm. So you better be ready to take action, and fast. There will always be buying and selling. There will be big firms doing it, small firms doing it, and mid-sized firms doing it. Our business will never be one of only big firms. Many seem to get to a certain size and lose their way. Nor are all mid-sized firms doomed to extinction. Every large firm will probably be mid-sized at some point in its evolution. Finally, there are new small firms being created every day. The barriers to starting up an A/E or environmental consulting firm are really pretty darn low. You don’t need a lot of capital at all to do it. Originally published 1/19/2004

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