Why phantom shares may grease the wheels when selling your firm

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When selling, or planning to sell, a professional services firm, it is important that the key personnel who are crucial to the on-going performance of the company are aligned to the majority shareholders’ exit goals. Without this alignment, they could be a less potent force in making those goals happen. Consider phantom shares as an alternative to employee share plans, in order to get that alignment in place.

What are phantom shares?

In simple terms, phantom stock does not include any real stock, it is like a cash bonus plan linked to the success of the company, where the timing, magnitude and phasing of the payout is determined by the deal terms you get in a liquidity event, such as your firm being acquired. Just like other forms of stock-based compensation plans, phantom stock serves to align the interests of recipients and shareholders, but without the same level of cost, complexity, and risks associated with a share scheme.

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Find the best buyer for your firm and employees

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When selling your consulting firm you will reach the point where you go into exclusive negotiations with your preferred buyer. This is after maybe 30 to 60 have been approached, 10 to 20 have expressed interest and of those 3 or 5 want to do a deal. If price is everything to you, then any buyer will do and no doubt you’ve selected the highest bidder. However this is rarely the case, beyond price there are usually other important exit goals.

There are several factors you should consider before going to market to sell your firm and during the sifting process towards closing a deal with your ideal partner.

Life after the sale – is your objective to exit immediately, do your earn-out and leave, or extend your career? If the latter, then the new home must be a company you really want to be a part of, doing the kind of work that inspires you, and provides you with superior benefits to the freedom and entrepreneurial life you’ve experienced so far.

Brand continuation and independence – are you happy for your company to be subsumed, or is it important that your brand grows as a result of new investment and assets provided by your buyer? Different buyers, financial and strategic, will offer different models and achieving the latter objective is more likely with financial investors than trade buyers, the former is more likely with Big 4 type entities.

Staff protection – how important is their future to you? If the reason for the acquisition includes economies of scale, some will be retained and some will go, so who do you want to look after? Buyer selection is key to how their loyalty is repaid. If most of your consultants came out of the Big 4 or other multi-nationals, they may not want to go back. Whereas others may be keen to be a part of a new company with more interesting work, career path and foreign opportunities.

Cast the net wide – considering the above, it will help in categorizing and prioritizing buyer types that may fit. When you take your firm to market, consider all the categories of buyer that may want your firm for different reasons. The obvious candidates are not always the best. Casting the net wide finds the surprise outliers that may offer a compelling opportunity.

Culture compatibility – after you’ve been presented to potential buyers and interested parties are in play, look hard at their culture. You’re coming from an agile, flexible organization, however if the buyer is a bureaucratic monolith, how likely is it that you and your staff can handle the red tape? If not, then the merger is likely to fail, along with your earn-out and legacy.

Price versus deal structure – You may have some good offers from companies that fit your criteria above, but perhaps one is offering an outstanding price. However, the headline price is likely to only provide 50% cash up front; the rest will (hopefully) come in the earn-out over two or three years. If another offer represents slightly lower total price, but is otherwise a better home for the business, you might seriously consider taking what at first appear to be less generous terms. Here is your opportunity to trade headline price for a better deal structure and/or reduced earn-out risk. As well as the best home for your business, you also want the highest possible likelihood of securing the other 50% of the deal.

Make sure you consider all of these factors throughout the process, because you are more likely to achieve a successful sale that ticks all of your hard and soft exit objectives. You will be richer, happier and more fulfilled when you have looked after yourself, your staff and legacy.

If you want to discuss your exit objectives and need a sounding board, please contact us and we’d be happy to help.

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Why define your exit goals well ahead of a transaction?

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There are many ways you can end up selling 100% of your firm, or some of your stake in it, but will the end result fulfill the things most important to you and yours? If you haven’t identified your goals, then the shape of the deal you ultimately sign may cause great future regret. “If only I’d done this or that” will forever be a thought imprinted in your mind. So the purpose of this blog is to help you formulate your goals by identifying typical owner aspirations. If you do this, then the route-map to the transaction and the terms you sign are more likely to deliver the rewards you want. You only usually get one shot at building a business and selling it, with significant life changing outcomes, so the sooner you define your exit goals, even years ahead of a deal, the better.

Let’s start by categorizing typical aspirations. In the table below there is a simple model to assist in the initial formulation of your goals.

Aspirations

Your aspirations may be simple, for example:

Price is everything, I just want the highest price I can get as soon as possible.

Or it may be a blend:

We want the best deal, but immediate exit for majority shareholders is important, we would trade price for the right buyer and exit terms. The right buyer is important because after our exit we want our former colleagues to do very well.

In following blogs we will cover each of the goals and aspirations in more detail and identify the considerations for each in planning ahead for a sale. Individually and together they require different plans and approaches to achieve the outcomes you want, such as:

  • Designing the business to be attractive to the ideal new home
  • Optimizing the timing of a sale and process approach to maximize the price
  • Designing yourself out of the business at least a year ahead of a sale
  • Planning for an MBO rather than trade sale to enable legacy continuation
  • Planning for a sale to a financial buyer to enable a flexible deal that provides both cash and ownership continuation.

In summary, if you don’t plan ahead, your goals are unlikely to happen by accident and you will accept the first unsolicited buyer approach that comes your way, without knowing how good or bad a deal it is! If you do it by design, then you can control the results.

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