If you’re thinking of selling your consultancy, there are many stakeholders to consider before embarking on the most important financial decision you’ll probably ever make.
1. Founder shareholders
We’ve had business owners wrongly assume that selling a business is like selling a home. If a sale falls through, your home remains largely unaffected and its value intact. However, that is not the case with a business – you only need to consider the time and effort spent on setting up a deal, along with vital competitive information you might have shared in the process. And, if you’ve never done this before, you lack the experience and knowledge to negotiate the best possible deal for you and your business (especially when earn outs are involved).
When engaging in a sale process, consultancy owners become distracted from the day-to-day job of bringing in new business and growing the firm, which can have a detrimental effect on equity value – another reason to bring in expert support.
Tip: Buyers are not interested in a business whose growth has either flat-lined or is in decline.
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.
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.