In his three-part series, Build or Buy? Equiteq’s Adam Blatchford discusses the pillars for successful growth through acquisition. Adam begins by addressing the fundamental question: Should you acquire?
As a shareholder, you have set goals, both personally and for your firm.
Those goals may include building enough equity value to retire, start a new venture, or support your family; everyone is different, but most owners have a timescale and an amount in mind.
Acquisition could help you achieve those shareholder goals; it can add value to your firm if it is carefully and clearly aligned to your overall business strategy.
Acquisition is not a strategy in itself, it is a means which can be used to deliver the strategic needs of your business plan. First your strategy must be aligned to your shareholder goals, then you can consider if acquisition is the right way to accomplish that strategy.
There are right and wrong ways to grow through acquisition; you want to be scaling smart, ensuring business growth translates into equity value growth by avoiding mistakes and missteps, so that you can deliver your business plan and create value in your firm. The best way to do this is to view your firm through the eyes of a buyer, considering how the shape of firm you are building will be attractive to a future investor.
There are a number of ways that acquisition can be valuable to deliver your strategic needs and to simultaneously build value to a potential buyer.
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.