1. My initial Zoom call with a prospective buyer went great. The culture and fit appeared perfect. The CEO of the buyer was a regular guy. Is that an indication that this will be a successful transaction?
Nope, that is just a first impression. We tell prospective sellers a transaction will take six to nine months from initial meeting to closing.
The reason for that is so there is plenty of time for the dating process, which entails several meetings and strategy sessions with key execs of the buyer. Who will you report to post-sale? Who will your executive team report to? What type of integration support will you receive from the buyer’s HR, Financial and IT department?
2. How important is total transparency with the Buyer?
Transparency with a buyer is essential. We recently sold a PR agency where the CEO/Owner wanted only to work three days per week post-sale. He had a great #2, his second in command. In effect, the #2 was managing the staff and had the relationships with key clients. In our first meeting with the buyer, we put that request on the table. We agreed to a 60% salary for three days a week. Case closed, all happy. Being transparent was critical in building mutual trust.
3. Will I be on a salary post-sale?
Of course, you will. No buyer will expect you to work gratis. You will receive a market salary in addition to your earn-out.
4. Will I be able to keep my perks post-sale?
Nope, sorry.
You should kiss goodbye your leased Roll Royce, your private plane flights, season football tickets or luxury baseball box.
Private clubs may be allowed if you can show they are used for marketing new biz or for present clients. Many buyers will be agreeable to that. Discuss this early on.
5. Will my name be removed from the company name?
Most likely after the firms are fully integrated, typically one-two years. There are always exceptions if the buyer is convinced your brand has long-term value.
6. Is there a rule for a down payment for the sale of my firm?
Generally, the rule is 20-35% of today’s Valuation. But there are many factors that will determine the down payment a buyer offers. Growth each year, profitability, longevity of clients, the team that services the largest clients, etc. So, if you are planning to sell your goal should be steady growth and 20% profitability (after recasting your P&L’s). The recasting should be performed by an experienced professional.
7. Will a Buyer juggle my numbers to minimize my firm’s profit during my earn-out?
Rarely, if ever, will a buyer play with your numbers. If your deal is structured properly and your LOI (Letter of Intent) is legally fail safe you should have nothing to worry about. You should have legally binding protection. Your law firm, in conjunction with your M&A advisory firm, will be responsible for assuring that protection.
8. Should I allocate a portion of my earn-out to my executive team?
Absolutely! You need your executive team to help achieve full value of the earn-out. Sharing your earn-out with them will incentivize them to remain with the buyer firm.
9. Does size matter?
Yes, “but” profitability and quality clients are more important than size. A $3 million firm with quality brand clients, with 25% recasted profitability is more valuable than a $5 million firm with mainly smaller, questionable less profitable clients.
We always counsel prospective sellers if, based on their size, the timing is right to sell. Our advice may be to continue to grow the firm, versus selling at that time.
10. What is the first step when a prospective seller engages your firm to represent them?
When we are engaged to sell a pr firm our first step is actually threefold.
- After a 90-minute Zoom meeting with the principle(s) we prepare a draft of an anonymous profile of the firm.
- We begin the extensive research process, identifying buyer firms that we believe may have interest.
- I personally put together the financial package for the prospective buyer, as well as a preliminary valuation of the firm. The valuation is crucial in that it provides a baseline for negotiation with the buyer. The valuation is proprietary and never given to the buyer.