Transcript Managing a Growing Firm
Maximizing Performance Growth & Value in Your A/E Firm
Ian Rusk, ASA ZweigWhite
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Introduction
Overview of Program
9:00 9:30 10:00 12:00 1:30 3:00 3:30 5:00 Day One: 8:00 8:15 Introduction / Program Overview Why grow? The current state of the A/E/C industry and why growth is critical to long-term success Market outlook [Break] Financial Management and Cost Control [Lunch] Capitalizing a growing firm / M&A as a growth strategy [break] Planning for ownership transition Program end
Why Grow?
Why Grow?
•
High growth correlates to high profits
–
Median Pre-tax Pre-bonus Profit (% of NSR)
• • • • •
High Growth Firms – 19.6% Low Growth Firms – 12.7% No Growth Firms – 5.9% Slow Decline Firms – 1.8% Fast Decline Firms – 1.3%
Why Grow?
•
Contributing Factors: Better labor utilization
–
Median Chargeability (labor utilization)
• • • • •
High Growth Firms – 61.4% Low Growth Firms – 59.6% No Growth Firms – 56.6% Slow Decline Firms – 59.5% Fast Decline Firms – 53.6%
Why Grow?
•
Contributing Factors: Lower relative overhead
–
Median overhead rate (overhead/direct labor)
• • • • •
High Growth Firms – 172.6% Low Growth Firms – 167.9% No Growth Firms – 186.3% Slow Decline Firms – 159.5% Fast Decline Firms – 202.4%
Why Grow?
•
Other benefits
– Career opportunities for staff – Opportunities to work on larger, more interesting projects – Greater job fulfillment – Ability to diversify services, markets and geographic footprint
Why Grow?
•
High growth increases market value
–
Size does matter! Larger firms are considered less risky by the marketplace
Why Grow?
•
A growing income stream is more valuable - example:
– Two firms with $200,000 in earnings – One is high growth (long-term growth assumption of 8%), the other is low growth (long-term growth of 3%) – One is considered high risk, the other low risk
Why Grow?
XYZ Company
After-tax, Pre-Bonus Earnings Add Back: Depreciation & amortization Deduct: Capital Expenditures Deduct: Working Capital Needs Cash Flow to Equity Holders Apply Growth Rate (x1.03) Divide by Capitalization Rate of 22% (25% - 3%) $ 200,000 110,000 (90,000) (20,000) $ 200,000 $ 206,000
$ 936,364
Why Grow?
XYZ Company
After-tax, Pre-Bonus Earnings Add Back: Depreciation & amortization Deduct: Capital Expenditures Deduct: Working Capital Needs Cash Flow to Equity Holders Apply Growth Rate (x1.08) Divide by Capitalization Rate of 14% (22% - 8%) $ 200,000 110,000 (90,000) (20,000) $ 200,000 $ 216,000
$ 1,542,857
Good Growth
Profitable Sustainable Differentiated Organic
Market Outlook
Market Outlook
•
2009 – A year of challenges, but glimmers of a recovery:
– GDP decreased at a rate of 1% Q2 of ’09 – Federal Reserve forecasts are for a 1% increase Q3 & Q4 – AIA Billing Index has been below 50 (indicating a decline) for over a year (currently at 43) – Even some of historically strongest markets (e.g. healthcare) have softened
Market Outlook
•
2009 – A year of challenges, but glimmers of a recovery :
– 12 th Fed District (encompassing Oregon and Washington States) • Retail, Services and Manufacturing Sectors continue to soften (exception being IT products) • Construction activity remains low • Demand for commercial real estate continues to decline
Market Outlook
•
2009 – A year of challenges, but glimmers of a recovery:
– On the positive side: S&P 500 up 33% since February – AIA New Inquiries Index has above 50 since February (indicating an increase in new opp’s) and is presently at 50.3
– Some positive impact from ARRA bill – Public A/E firms “out-recovering” the broader market
Relative Performance
40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60%
Jun-07 Sep-07 Dec-07
ZW15
Mar-08
ZWI
Jun-08 Sep-08
S&P 500
Dec-08 Mar-09
S&P 700
Jun-09
Market Outlook
•
Fundamental Drivers of Demand Aren’t Going Away:
Market Outlook
•
Water / Wastewater Market
– Water is the oil of the 21 – U.S. Water / Wastewater Industry is estimated at over $120 billion st century – While some short-term drivers such as residential development have eased, long-term drivers remain – Aging infrastructure: Some estimates put leakage rates of aging water infrastructure at 50% – Global drivers include population growth, and changing consumption patterns (emerging middle classes of India and China)
Market Outlook
•
Water / Wastewater Market
Market Outlook
•
Transportation / Infrastructure
– ARRA bill devotes 60 billion for construction & government contracts of which: • $27.5 billion for highways • $17.7 billion for public transportation • $6.9 billion for transportation equipment • $12 billion for federal facilities • $4.6 billion to Army Corps of Engineers – Another $110 billion devoted to energy & environment • $11 billion for electricity grid • $60 billion for renewable energy • $10 billion for clean water projects • $27 billion for “other projects”
Market Outlook
•
Transportation / Infrastructure
– Oregon Stimulus Funding : • $6.5 billion slated for the state with $333.9 million targeted toward transportation (highway, road, bridge, port and rail)
Market Outlook
•
Transportation / Infrastructure
– Washington Stimulus Funding: • $10.4 billion slated for the state with $492.2 million targeted toward transportation (highway, road, bridge, port and rail)
Market Outlook
•
Demographic-driven markets
– U.S. census projected population age 65 and over to double from 2006 to 2030 – By 2030, close to 20% of U.S. population will be 65+ (72 million people) – General health of this segment continues to improve, and those with chronic medical conditions are living longer
Market Outlook
•
Demographic-driven markets
Market Outlook
•
Demographic-driven markets
– Global population on track to reach 7 billion by 2011, with China and India leading the way – Represent a 1 billion increase in just 12 years!
– Highest growth is in least developed countries (Africa and Asian continents) – Still opportunities in the Middle East – Population migrating from rural to urban centers
Think about these and other drivers of demand for engineering services as you plan your long-term strategy
Market Outlook
•
2009 – A year of challenges and opportunities:
– Credit markets notwithstanding, this could be one of the best times to be a strategic buyer – Valuations at a low point (but are they at the bottom???) – Economic decline stabilizing (but when and how quickly will it rebound???)
Managing by the Numbers
Basic Financial Management
• More important than ever to “own” your numbers • What sort of metrics would you’d want to see regularly (your “heads up display”)?
Basic Financial Measures
• Revenue and Revenue Growth – Focus on net service revenue – Growth over multiples years should be expressed as a compounded rate (CAGR) • Profit Margins (as % of net service revenue) – Operating Profit (before non-operating expenses, interest, discretionary expenses, extraordinary expenses and taxes) – EBITDA (earnings before interest, taxes, depreciation & amortization) – 13.6% – EBIT – Pre-tax, Pre-bonus Profit – 11.3% – Net Income
Basic Financial Measures
• Balance Sheet Measures – Working Capital (current assets less current liabilities) – Current Ratio (current assets / current liabilities) 2.33
– Quick Ratio (cash, AR only) – 2.11
– Total Liabilities-to-Equity Ratio – 0.9
– Interest-bearing debt-to-equity – 0.2
* Numbers above represent industry medians from the ZweigWhite’s 2009
Financial Performance Survey
Basic Financial Measures
• Balance Sheet Measures (continued) – Debt Service Coverage Ratio (cash flow divided by principal & interest payments on debt) – Return on Assets and Return on Equity (more meaningful when based on market value of equity) ROA – 23.1%, ROE – 50.3%
Basic Financial Measures
• Industry Specific Performance Metrics – Chargeability (Utilization) – direct / total labor – 59.5% – Net Multiplier – NSR / direct labor – 3.12
– Revenue Factor – NSR / total labor – 1.80
– Overhead Rate – overhead exp’s / direct labor – 170.3%
Basic Financial Measures
• Predictive metrics – Fee Backlog (at a point in time) – Sales of new work (over a period of time) – Proposals pending (at a point in time) – Proposals made (over a period of time) – Volume of inbound inquiries – Proposal success rate (dollar weighted)
Revenue, Proposal and Sales Volume
$1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Jan Feb Mar Apr
Proposals
May Jun
Sales
Jul Aug Sep
Revenue
Oct Nov Dec
Other Performance Metrics
• What other metrics are meaningful for your unique business?
– WIP or bad debt write offs – ACP and associated interest costs – Employee turnover – Others? (audience participation time)
Form and Frequency
• Various types of reporting might have different frequency
– Annual – a corporate-style annual report (serves many potential internal and external users – Monthly or quarterly detailed performance report – Weekly sales and cash flow reports – Daily accolades
Form and Frequency
• Use the push/pull approach
– “Push” out reports such as those outlined above – Allow staff to “pull” out info as they need it – Particularly important for project managers and department heads
Project-level reporting
Project-level reporting
Project-level reporting
Managing Costs
Managing Costs
•
Managing costs in most engineering firms means managing labor costs
– Labor is typically 50%-60% of a firm’s net service revenue (not including benefits and payroll taxes, which make up another 10 20%) – In a volatile economic climate, maximizing profits requires close management of labor costs
Managing Costs
•
Managing costs in most engineering firms means managing labor costs
– Watch staff utilization levels – median for engineering and E/A firms is 61% – Under-utilized principals are often the chief culprits – Typical principal utilization rate is 50%
Managing Costs
•
Managing costs in most engineering firms means managing labor costs
– Many firms have had to institute pay cuts over the last 12 months. • Try to limit principals or management if possible • When cutting across the board, provide an opportunity to make it back (i.e. through a profit sharing or other type of incentive plan)
Incentive Compensation Plans
Performance bonus Profit sharing Spot bonus Referral bonus Holiday bonus Project bonus Service awards Equity-based plans Signing bonus Sales commission Retention bonus 65% 43% 21% 17% 13% 11% 10% 8% 8% 5% 2% 70% 60% 50% 40% 30% 20% 10% 0% 65% 43% 21% Source: 2008 Incentive Compensation Survey of Architecture, Engineering, Planning & Environmental Consulting Firms (ZweigWhite) 17% 13% Performance Bonus Profit Sharing Spot Bonus Referral Bonus Holiday Bonus
Incentive Compensation Plans
Incentive Compensation Spending
Incentive compensation spending as a percentage of NSR
Upper Quartile 5.5% Mean 4.9%
Incentive compensation spending as a percentage of payroll
Upper Quartile Mean 12.2% 10.4% Median Lower Quartile 3.5% 1.9% Median Lower Quartile 3.8% 7.5% Source: 2008 Incentive Compensation Survey of Architecture, Engineering, Planning & Environmental Consulting Firms (ZweigWhite)
Incentive Compensation Plans
•
Equity-based incentive plans
– Ownership transition plan – Employee stock purchase plan (ESPP) – Employee stock ownership plan (ESOP) – Stock option plans – Synthetic Equity (Stock appreciation rights/phantom stock plans) – Deferred compensation plans (careful of new IRC 409a requirements)
Incentive Compensation Plans
•
Elements of a good incentive comp plan
– Consistent with core values and culture of the organization – Align individual objectives with firm-wide strategic initiatives – Recognize, reward and motivate outstanding performance – Structure/bonus formula that is easy to understand
Managing Costs
•
Other considerations
– Largest single fixed G&A expense for engineering firms is rent – Small, unnecessary branch offices are one of the most frequent causes of high fixed overhead – Median overhead rate for engineering & E/A firms is 165% – If yours is higher, primary causes are likely to be low utilization rates and/or an inefficient office network
Managing Costs
•
Other considerations
– The world is flat! Are there services that could be done better and cheaper offshore?
– Consider things you may already out-source (e.g. IT services). – Offshore in-sourcing vs. inshore out-sourcing
Capitalizing a Growing Firm
Sources of Capital: Costs
•
Costs of Debt
– Rates tend to be based on market indices, like the Prime Lending Rate (3.25%), or LIBOR – Current interest rates are low, but credit standards are tighter – Tax deductibility of interest payments makes effective cost even lower – Credit facilities: Revolving line of credit (short-term, A/R is the borrowing base); Financing line of credit (converts to term debt); Long-term debt
Sources of Capital: Costs
•
Costs of Debt
– Short-term borrowing is generally cheaper than long term (example: prime for LOC, prime + 1 for term debt) – Firms considered riskier will pay higher rates (risk factors: credit history, financial leverage, financial performance, debt service coverage ratio, collateral coverage) – Small firm owners must often sign personal guarantees (strategies for managing risk – limitations, indemnifications)
Sources of Capital: Costs
•
Cost of Equity
– Rate of return = stock appreciation + annual payout (dividend or distribution) as a percentage of the investment value.
– Example: A shareholder owns stock worth $100,000 at the beginning of the year. By year-end, the stock has gone up in value to $110,000, and the shareholder received a $20,000 distribution. Total return equals $30,000, or 30%.
– Cost of equity capital is much higher than debt
Sources of Capital: Costs
•
Equity Rate of Return – Build-up model
Risk Free Long-term Government Bond Rate 20-yrs Common Stock Equity Risk Premium Small Stock Equity Risk Premium Subjective Risk Premium E E mr E s U dc
Discount Rate
Source: SBBI-Ibbotson Associates, Inc., Chicago, Illinois, Beta excluded.
Federal Reserve Statistical Release
E r
rf 5% 7% 9% ???
21%+
Sources of Capital: Costs
•
A growing A/E or environmental consulting firm needs access to both sources
– Debt capital will be limited due to lack of collateral – While cheaper, the default risk can be a psychological growth barrier for firms with high debt levels – Access to equity capital requires a well-considered ownership plan
Sources of Capital: Costs
•
Demographic trends are not in your favor
Sources of Capital: Costs
•
Demographic trends are not in your favor
Sources of Capital: Costs
•
Access to equity capital / ownership planning requires:
– A detailed shareholders agreement governing all transactions of stock – A method of stock valuation (internal formula or agreement to have company appraised annually) – A plan for financing (or facilitating financing) for buyers
Sources of Capital: Costs
•
Access to equity capital / ownership planning requires:
– On-going feasibility testing to be sure redemptions can be managed – A development program for future shareholders
Sources of Capital: Costs
•
Other Capital Sources: Private Equity Financing
–
The list of A/E and environmental firms with private equity financing is growing
•
CSA Group [Hispania Capital Partners]
• • • • • • • • • •
Schoor Depalma [Trivest] Callison Architecture [Blue Point] Apex Companies [Blue Point] Cummings, LLC [Long Point Capital] Natural Resource Group [Stone Arch Capital] EM-Assist [Venatus Capital Partners] Capri Engineers [Stone Capital Partners] Wildlands, Inc. [Parthenon Capital] Trinity Consultants, Inc. [Sentinel Capital] Clough, Harbour & Associates [Long Point]
–
Recent private equity exits
•
ENSR [sold to AECOM]
•
EYP Mission Critical [sold to Hewlett Packard]
Sources of Capital: Costs
•
Private Equity Financing
– PE firms typically take a controlling interest stake (but not always) – Management team retains a significant stake (potential second bite of the apple) – PE investor may leverage firm – Expect big management fees, and pressure to perform – PE firms are NOT long-term investors—understand the likely exit strategy
Management of Cash Flow
We’re Living in Dangerous Times
•
Cash flow management is critical in economic downturns like the present
– Accounts receivable at greater risk – Must watch cash outflow carefully – Cash flow forecasting is the key
Management of Cash Flow
•
Even organic growth requires cash
– Example: A $10 million net service revenue firm grows by 10%. It’s average collection period of A/R is 80 days. Growth will result in an increased investment in working capital of $219k.
– Managing operating cash flow in a growing firm is, therefore, critical
Management of Cash Flow
•
Cash flow forecasting
Merger & Acquisition Strategies
M&A Activity
M&A activity comes in waves coinciding with economic activity In spite of weak economy, consolidation continues (100 AE transactions YTD) Buyers stock values have recovered since this time last year Sellers may still have high value expectations, but values are generally down
M&A Activity
•
2009 Transactions in Washington & Oregon
Record M&A Activity
Drivers of M&A activity
Difficulty in accomplishing internal ownership transitions Challenge of firms with 100-500 staff – eat or be eaten?
Clients’ demands for scale and full-service model
What does a typical deal look like?
Most involve an ENR 500 firm buying a smaller firm*
– Median size of selling firms was 30 employees – Median size of buying firms was 400 employees
Vast majority of deals in our space are niche deals; “manageable” bets either for scale (“do more of what we’re good at”) or diversification (“we need to be there/doing that”)
*
Transaction data from 2006 - 2007
What does a typical deal look like?
Most are asset rather than stock deals Transactions often mix of cash, stock*, & notes (no “credit crunch” here) Earnouts remain popular but can be barrier to integration Employment agreements and compatible salary/incentive compensation structures are key *
This makes the method you use for your own firm’s stock valuation critical
M&A Risk Factors
Seller Expectations
– Valuation expectations will often be high: 75% of NSR, 6.0x EBITDA, 2.5x book value (median values).
– Actual deal values from same survey are lower: 60% of NSR, 3.3x EBITDA, 2.2x book value (median values).
– Valuation of privately held AEC firms is both an art and a science!
– Size, profitability, growth, capitalization all impact valuation
Valuation by Multiples Why aren’t AEC multiples higher?
Nature of industry (mature / stable growth) Low barriers to entry = thousands of firms offering “commodity” like service Project-to-project, uneven cash flow stream Lack of Scalability Intangible assets (people-based business) Reliance on rainmakers vs. institutional brand value
M&A Risk Factors
Retaining clients and motivating key staff
– Resentment among the minority-interest or non owners may linger – Deal value will be significantly diminished if key talent exits post closing – Competitors will come after target’s clients and staff – Cultural fit and firm integration is key and most difficult part of M&A process!
2009/2010 M&A Outlook
Pendulum shifting back to buyers as markets recover Continued weakness in U.S. economy will produce more “distressed” sales?
Buyers will use more stock as currency and earnouts to mitigate risk Long-term, baby boomer retirement and lackluster internal share demand will drive supply (recall demographic slides) When planned and executed properly, M&A still an effective tool for strategic growth
Valuing a Firm for Acquisition
Approaches to Valuation
• • •
Earnings Approaches
– Discounted Cash Flow (DCF) – Capitalization of Cash Flow (Gordon Growth Model)
Market Approaches
– Publicly Traded Guideline Method – Market Transactions (M&A) Method
Asset Approaches
Required Rate of Return
Risk Free Long-term Government Bond Rate 20-yrs Common Stock Equity Risk Premium Small Stock Equity Risk Premium Subjective Risk Premium E E mr E s U dc
Discount Rate
Source: SBBI-Ibbotson Associates, Inc., Chicago, Illinois, Beta excluded.
Federal Reserve Statistical Release
E r
rf 5% 7% 6-9% ???
18 - 21%+
Capitalization of Cash Flow Capitalization of Cash Flow
Projected Cash Flow Discount Rate (A) Long-term Growth Rate (B) Capitalization Rate (A-B) Value = Cash Flow / Cap Rate $ $ 20% 5%
15%
Market Approaches
• Publicly traded guideline company method – Attempts to use market values of similar, publicly traded companies as a basis for determining value.
– Problem in the A/E/P & environmental consulting industries is the small number of publicly traded firms.
– Vast size difference also makes comparison difficult.
• Market Transactions Approach – Uses actual merger/acquisition data.
– Data more difficult to come by.
Market Approaches
•
Market pricing data is applied to the subject firm by determining various multiples or factors such as:
– Value / Revenue – Value / Earnings – Value / Book value – Value / Fee Backlog – Value / # of full-time employees
Market Approaches
ZweigWhite Merger & Acquisition Transactions Trailing Five Years (A/E/P & enviro firms only) Equity Value / Book Value TIC Value / Gross Revenue TIC Value / Net Service Revenue TIC Value/ EBITDA Equity Value / Net Income TIC Value / # of Employees 2.23 x 0.56 x 0.62 x 4.9 x 6.8 x 68,993
Other Considerations
•
Marketability discount
– must account for the lack of liquidity of a privately held firm [30% is typical] •
Controlling vs. Minority ownership interests
– holders of small blocks of shares cannot control the actions of the firm [20% discount is typical]
ZweigWhite Valuation Survey
• ZweigWhite’s Valuation survey is a good tool for a “benchmark” valuations • ZweigWhite surveys the industry annually, asking firms to report their valuations and certain financial factors that drive value • Data is compiled and sorted based of firm types and depending on the quality and purpose of the valuation • Note that Z-formulas generally reflect minority interests often for internal ownership transition purposes, so when using for M&A purposes, you may need to apply a control premium (25%+/-)
2009 Z2 and Z3 statistics ZweigWhite Valuation Survey TIC Value/Net Service Revenue Equity Value/Pre-tax, Pre-bonus Profit TIC Value/EBITDA Equity Value/Book Value TIC Value/Employee TIC Value/Backlog Z2 Formula 51% 4.21x 5.10x 1.76x $54,426 67% Z3 Formula 46% 2.60x 3.26x 1.77x $49,118 68%
Evaluating an Acquisition Target
• Note that the strongest performing firms may not make the best acquisitions as price expectations will be high.
• Poorly performing firms that can be “rescued” may be better opportunities from a risk/return standpoint.
• Acquisitions must fit with the firm’s strategic goals.
• Most buyers look for a 3-year payback period.
Evaluating an Acquisition Target
•
Understanding future earnings capacity:
– Backlog: How does it compare to prior years? What is it composed of? How “firm” is it?
– Key Staff: Who are the people selling work and managing client relationships? Are they at risk of leaving post-closing?
– Are there concentrations of revenue with certain clients that could be at risk? – Will the acquisition result in loss of certain clients and associated revenue (loss of MBE status, loss of sub consultant business, etc.)
Evaluating an Acquisition Target
•
Subjective risk factors to consider:
– Revenue and earnings volatility – Concentrations of revenue and lack of market diversity (geographic, service type, or client type).
– High risk service types, history of quality problems.
– Poor collections and cash flow problems.
– Lack of management depth.
– Dependency on key rainmakers.
Key Points For Success
• Align yourself with a compatible culture • Address issues involving seller head on (lack of software licenses, unproductive principals, unproductive offices) • Pay attention to integration issues • Understand the after-life (post-closing) • Pay attention to the restrictive covenants
Key Points For Success
• Use intermediaries to negotiate and avoid head to head clashes • Understand your motivation to buy or sell • Build a rapport with the buyer or seller • Assemble a competent and experienced team of external advisors • Understand the ongoing employment obligations
Planning Your Exit
Exit Strategy Options
•
Ownership Transition is a synonym for developing an Exit Strategy
•
An Exit Strategy is a process that owners formulate when they reach a point in their business life where they begin thinking about the following:
Exit Strategy Options
–
How to realize the fruits of their labor?
–
When they begin to look forward to "slowing down" or retiring
–
When other firm members begin to push for ownership and/or management succession
Exit Strategy Options
–
When health issues become apparent
–
When the size of the firm begins to require more owners, more capital, more complicated operations
–
When it feels to be the right time (including watching peers transition)
Exit Strategy Options
•
Internal Transition - Need time and second tier of leadership to purchase the stock. Perpetuates the firm, but may not maximize price.
•
External Transition – Maximize price, reduce risk of exit
Exit Strategy Options
•
Employee Stock Ownership Plan (ESOP) (Internal) Great tax benefits for Seller and company and also establishes a stock bonus plan for employees. Form of leveraged management buy-out (LBO).
Exit Strategy Options
•
Leveraged Recapitalization – Borrow money and pay it out to owners (dividend). Essentially means mortgaging the firm's assets and future and while it may increase some liquidity for the owners it reduces firm's ability to finance future growth and decreases flexibility to take advantage of opportunities or weather an economic downturn.
Exit Strategy Options
•
Initial Public Offering (IPO) - Not available for smaller firms generally and brings new reporting and regulatory hurdles/headaches as well as a new constituency.
Motivations
•
Internal Transition is motivated by:
– – –
Paternal/maternal feelings Loyalty to key long-term employees Lack of easy identification of outside parties
Motivations
•
Internal Transition is motivated by (continued):
–
A feeling that the process is simple (legally and financially)
–
Concern as to cost of an outside sale (direct costs and labor costs)
– –
A fear of the unknown owner A desire to maintain culture
Motivations
•
External Sale is motivated by:
– – –
A desire to maximize the ultimate sales price A feeling that security is better from a third party A concern that the next generation is not capable of running the business and making the required payments
Motivations
•
External Sale is motivated by (continued):
–
A concern as to risk tolerance on the part of key employees
–
A desire to see the company prosper and expand
Motivations Key Differences between an Internal Transition and External Sale: Sales Price Security Outside Costs Time to Complete Effect on Employees Human Resources Issues Internal Transition Lower More Risky Lower 5-10 years (or more)* Generally Positive Not a big Concerns External Sale Higher Less Risky Higher 6 months to 1 year* Sometimes Negative Could be a concern Effect on Clients Little Effect Requires attention; Usually positive * Time to complete differs on many factors
Top Reasons Firms Sell
•
Exit strategy for owners - even for owners who have planned a sale could be a better way to get their equity out and perpetuate the business. This approach provides liquidity for the exiting owners.
•
Maximize shareholder return.
Top Reasons Firms Sell
•
Turn-around or rescue situation (bailing out of a sinking ship).
•
Part of growth strategy - many firms think that growth can only occur through acquisition or hiring staff, but becoming part of a larger entity can be a growth strategy, too.
Top Reasons Firms Sell
•
Provide greater opportunities for employees - in a smaller firm, employees' chance for advancement may be limited. In a larger company, there may be more opportunities for career growth.
Top Reasons Firms Sell
•
Better services to clients (become one-stop shopping) - can provide a wider array of services to existing or new clients who may be expanding and require more full-service providers.
Top Reasons Firms Sell
•
Expansion into new market-sectors - many firms are focused on one or two client types, this provides diversification.
•
Geographic expansion - serve clients in new geographic areas.
Top Reasons Firms Sell
• Need for stronger management expertise to take firm to next level - the owners of many firms have maxed out their ability to manage the firm. • Ownership Transition Failure.
• Leadership Succession Failure.
• Unsolicited Offer.
• Principals leave the firm.
Making Your Firm “Transaction Ready” (internal or external)
• Operate profitably and businesslike (steady, reliable earnings are the key) • Separate personal life and family matters from the business • Establish and sustain a bank relationship to allow for growth and working capital • Keep complete and well-organized records - HR, financial, project materials.
• Have tight project controls and reporting
Make Your Firm “Transaction Ready”
• Keep administrative policies current – overtime policies, timesheets, vacation, etc.
• Confront Unproductive Principals – do not allow “deadwood” to drag down your firm • Resolve any pending liability issues if possible (personnel issues, pending lawsuits, software licensing deficiencies, etc.)
Make Your Firm “Transaction Ready”
• Institute and implement an ownership program secure the commitment of middle managers. Internal ownership transition and external transactions are not mutually exclusive.
• Update financial reporting on an accrual basis
Make Your Firm “Transaction Ready”
• Adopt a management succession and training plan allow the future leaders to learn how to manage.
• Be able to articulate the firm’s goals and objectives what is the firm all about? What is its mission? Make sure all internal team members are on the same page.
Q&A Ian C. Rusk, ASA ZweigWhite 321 Commonwealth Rd Wayland, MA 01778 Phone: 508.651.1559