IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Seth Rudin. Mr. Rudin is a senior M&A Intermediary at IBA (www.ibainc.com):
Guidance for Selling a Professional Service Firm
Three things to look out for.
There are many considerations for selling a professional services firm. Professional service companies have been in our civilization for hundreds of years. They range from companies serving highly technical and complex problems to routine business functions. For example, companies may help their clients with complex issues such as conducting engineering services ranging from civil engineering to architecture, construction management, information technology services, and much more. Other traditional firms focus on legal services (law firms), accounting, escrow management, financial planning, and marketing services. Then, there is consulting and even mergers and acquisitions/business brokerage.
IBA has helped hundreds of professional services firms plan and reach a successful exit or merge into a new firm. Typically, these businesses are owned by a single founder or a group of partners. They are often formed as a partnership or limited liability company/S-Corp, with a smaller percentage electing to be C-Corps.
With IBA’s long history of handling the business sale of professional service companies, we understand the nuances that may arise during the sale of these companies. Therefore, it is essential to our clients that we can demonstrate our knowledge, skill, and expertise as we lead them through the sales process. For a business owner, the sale of their business is not only time-consuming but also a very stressful period in their lives. Our leadership can put them at ease as we help guide them through the complex and detailed process of selling their business.
Let’s dive into a few critical considerations of selling a professional services firm.
First, most professional services firms are asset-lite companies. Their value lies within their brand, market share, systems, management, and employees’ expertise, knowledge, and training. The loss of key employees is a critical issue for their business. Thus, the ownership must maintain a positive and competitive work environment. This includes the work culture, compensation, and various retention programs available. This can be via stock options, financial bonuses, and benefits packages. Most buyers acquiring an engineering firm, consulting firm, a market research firm, accounting firm, or similar services firm will want to see employment contracts and retention programs for key employees.
Second, professional services firms with multi-year and long-standing contracts tend to value higher than those with shorter-term or “one and done” contracts. Additionally, buyers tend to prefer businesses with recurring revenue streams. This is subtly different from a multi-year contract/agreement. For example, a consulting firm may have a three-year agreement to configure an ERP system; once the system is complete, the project ends. In comparison, an IT consulting firm that provides ongoing maintenance and security compliance for a monthly fee with no end termination date may sell at a higher cost. A best practice is for management to maintain a robust contract repository. Most buyers will request to include an assignment clause in the purchase agreement so the new owner can assume the ongoing contracts without renegotiating the firm’s agreements with their client base.
Third, when transitioning the sale from the seller to the buyer, the buyer and seller will need to account for the projects that are still a “work in progress.” Thus having a strong project tracking system for which projects are active and understanding the hours billed to date versus how many hours are left at the time of sale will help to simplify the selling process.
Lastly, while some buyers will acquire the business as a cash sale, most will seek debt financing to gain the best cash-on-cash returns. As the US Prime Interest Rate (http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm)
continues to rise, some banks have tightened their credit policies. Sellers must be cognizant that some industries or markets they serve may fall outside the bank’s ability to underwrite. This includes residential real estate and other discretionary/volatile verticals. As a result, sellers may need to consider providing additional seller financing that was unnecessary in prior years.
Recently, IBA sold a 40-year-old civil engineering company. The owner had been involved with the firm since the early 1980s, and this was all he knew professionally. He had promised his wife that he would retire by 60 so they could travel the world while they were healthy. I am glad to say that IBA helped this owner reach his goal. However, as with almost every deal, we had to overcome a few bumps along the way. Since we had seen most, if not all, of his issues before, we could proactively navigate all of these matters swiftly and efficiently from employee & customer retention to securing financing.
Whether you are selling an engineering firm, construction services company, escrow services, marketing company, law firm, or accounting firm, our professional services division can help you value your firm, confidentially create a marketplace for its sale, and negotiate the final contracts to close.
If you have questions relating to the content of this article or the process associated with selling a professional services firm, Seth Rudin would welcome the opportunity to talk with you. Mr. Rudin can be reached at (425) 454-3052 or firstname.lastname@example.org.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.