How aligned are the shareholders as you prepare for sale?

Alignment

By David Jorgenson, CEO, Equiteq.

Some may think that once the shareholders agree they’d like to sell the business, then this means that everyone is on the same page and it’s now a matter of finding a buyer. However there are a wide-range of issues that need to be agreed on in order to present a united – and attractive – front to prospective buyers.

Timelines and value are two of the most immediately evident points to agree on. If one shareholder wants to sell now for $1m, the second shareholder wants to sell in 2 years for $5m and the third wants to receive $10m for their share no matter how far in the future, then there needs to be some discussion about how to get the best outcome for all involved.

There is then the practicality of what actually gets paid. A deal can be structured in a variety of combinations with cash, shares and earn out lengths all in play and of differing appeal to shareholders involved. Shareholders will receive a payment which is proportionate to the terms of their agreement and a good deal adviser will keep all parties apprised of changes and what they will be taking out of the business at all times. Before embarking on a sales process, consultancies should ensure they have a well-drafted shareholder agreement to avoid problems down the line when a sale is well advanced.

As our buyers research report shows, cultural considerations permeate almost every aspect of a deal and shareholder alignment is no exception. For example, if a shareholder left a particular consultancy for a reason and that consultancy now wants to buy their business, then that does not bode well for the deal going through. Does the buyer want to subsume the acquisition while some of the shareholders are very attached to keeping the stand-alone brand? Is the buyer very corporate, with demanding reporting? Some of the shareholders may have set up on their own to be more entrepreneurial and avoid such demands. There is a lot for the shareholders to discuss and agree on.

In all the excitement of the deal, it’s important not to forget that it’s likely that the shareholders will have to continue to work in the business for an earn-out period. Motivation during this time needs to remain high among all the shareholders. This may be difficult when there is a big sum of money sitting in the bank, but all the shareholders must remain aligned with the investor’s objectives for it to be a success.

Finally, what happens if the deal doesn’t complete? Selling a business is a high-pressure situation and can be like being on a rollercoaster. If the deal fails to go ahead – whether at the due diligence point, or a buyer pulling out even later – will all the shareholders be able to recover and get back to growing the business and motivating their team? It’s worth regular reminders during the sales process that nothing is settled until everyone has signed on the dotted line.

We’ll shortly be taking a detailed look at how to build shareholder alignment through a shared vision, incentives and shares or options.

If you are preparing to sell your consulting firm and would like to discuss your exit plans, please get in touch.

Are you a member of Equiteq Edge? It’s full of content to help consulting firm owners prepare for sale and sell their business. Register here to gain full access.

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