Episode 2: Seven Mistakes to Avoid When Selling Your Firm
In Episode 2 of The Boutique with CapitaL 54, the team pinpoints 7 common mistakes made when trying to sell a professional services firm. Learn how this theory is proved and how to avoid making these mistakes.
Various Speakers [00:00:01] You can avoid these landmines. It’s a buy versus build conversation. What’s the root cause of that mistake? Very moved by your story. Dive all in on the next chapter of your life.
Sean Magennis [00:00:15] Welcome to the Boutique with Capital 54, a podcast for owners of professional services firms. My goal with this show is to help you grow, scale, and sell your firm at the right time for the right price and on the right terms. I’m Sean Magennis, CEO of Capital 54, and your host. On this episode, I will make the case that there are seven common mistakes made when trying to sell a professional services firm. I’ll try to prove this theory by interviewing Greg Alexander, Capital 54′ s chief investment officer. We can all learn a lot from Greg as he has seen dozens of firms trying to sell their business every year. Selling your boutique is a high risk, high reward initiative. I’d like to spend some time on the common mistakes made when selling. My hope is that by listening to this, you can avoid these landmines. Every situation is different. However, these are the most commonly made mistakes. Mistake number one is boutique owners are unclear as to what they want from the sale. Greg, why do you think this mistake keeps happening?
Greg Alexander [00:01:38] That’s a great one and it is appropriately listed as number one because if you get this wrong, the impact is great. On a previous episode, I think it was titled The Difference Between a Happy in an Unhappy Exit. Now, I encourage the audience to look at that and listen to that. I went into detail on how to understand why you’re selling and I really encourage everybody to check that out because it’s, it’s foundational. But to summarize here, if you’re unsure of who you are, you will be unhappy with the sale. If you don’t know where you are headed, you will be unhappy with your sale. There’s no amount of money that will change us. I’m speaking from personal experience and I’m also speaking on behalf of those who I’ve helped sell their firms after the sale is complete, there’s no going back. So be sure that you know what you were doing before you go down this path.
Sean Magennis [00:02:31] Powerful, powerful number one message. So mistake number two is sometimes boutique owners try to sell an unsellable business. Greg, it appears that that comes up a lot. Why is that?
Greg Alexander [00:02:46] You know, most boutiques really are unsellable. It’s not enough to have a successful boutique. Your firm needs to be attractive to a buyer and that requires you to look at your business as an investor would, not as an operator. The investor starts by listing all the reasons not to buy your business, and the owner starts with a list of all the reasons to do a deal and this gap often cannot be closed. So prior to selling, be sure that you have something worth buying a lot more this and in coming subsequent episodes of this show but before you take your business out to sell, make sure it’s somebody might want to buy it.
Sean Magennis [00:03:30] Outstanding. Greg, so mistake number three, it takes years potentially to sell a boutique. Yet some owners try to sell their firm in a matter of months. You and I have seen this. This results in many failed attempts or worse, a lot of forced sales. Why does this happen, Greg?
Greg Alexander [00:03:51] Well, the process to actually conduct a transaction somewhere between six and 12 months. I’d say most often around nine months. It’s about how long it took me to sell my firm. However, the process of preparing to sell can take two to three years and you want to take your time preparing to sell because you want to exit on your terms. It takes time to stack the deck in your favor and as they say, you only have one chance to make a first impression. So it’s best to be ready, so don’t force it. Understand what investors are looking for. Give yourself time to make sure that your business has all the attributes that would make it attractive to a potential buyer and that’s going to take two or three years to get ready and then the actual transaction itself might take around nine months.
Sean Magennis [00:04:40] So factor in your nine-month plan and make sure that you truly are ready to sell. Let’s pivot to mistake number four. A man is boutique owners under-invest in succession planning. What are the consequences of underage investing in succession planning, Greg?
Greg Alexander [00:04:58] The big one is seller’s regret. After you sell, you’re going to want to see your boutique do well without you. You’re going to have many employees you care about who are still employed by the firm. If you hand over your baby to a stranger, they may destroy it. A big bank balance does not compensate you enough for this tragedy. I would recommend spending years grooming your successor and make sure that they build on what you have created when you sell your firm it should be a great moment in your life, you don’t want to have any seller’s regret and seller’s regret will show up with after you leave if within a year or two you don’t even recognize the firm and people that you care about have been mistreated. So be sure that you really know what you’re getting into before you sell it.
Sean Magennis [00:05:49] Excellent point Greg, and I’ve seen you live that in your own career very powerfully with your successor. Mistake number five. This is where entrepreneurs think that they can sell a business on their own. This results in tactical execution errors that can cost the owner millions. What’s the root cause of that mistake?
Greg Alexander [00:06:12] Yeah, I for the life of me, I can’t understand why anybody would want to do this, but it happens all the time and I think the root cause here is that most boutique owners are entrepreneur founders, and that means they are very different from hired gun CEOs. Founders as a group have a high-risk tolerance level and they are supremely confident in their own abilities. They approach the selling of their business is just another problem to solve, or maybe just another sales campaign, and they assume that they can figure it out. This is a big mistake and this is not an area to go cheap. Hire the best advisor, advisors that money can buy. Investment bankers, attorneys, accountants and let these advisors guide you through the process. This is where you truly get what you pay for.
Sean Magennis [00:07:05] It makes a lot of sense. So mistake number six. This is where boutique owners often get attacked after the sale and they take it very personally. This may cause and does cause sellers regret. What’s behind this aspect, Greg?
Greg Alexander [00:07:23] Human nature. I mean, yeah, you know, those that you are leaving behind are going to be jealous. They’re going to feel that that they were cheated and underappreciated and sometimes I see they begin to tell a story that’s not based, in fact. Rather, they tell themselves a story that they need to tell and make themselves look good and feel good. And when this happens, I’ll tell you, if you’re somebody listening and you think this isn’t going to happen to you, it is. Don’t take it personally. This is just business. You’ve created the wealth and therefore you’re the one to realize it. Don’t apologize for that. Those who helped you along the way have benefited and they’re going to continue to benefit. Rest your head peacefully on the pillow at night. All that matters is what you see in the mirror.
Sean Magennis [00:08:14] Beautifully said, Greg. So mistake number seven is to be sure to understand who the business is being sold to and what their motives and motivation are. Why is this aspect important?
Greg Alexander [00:08:30] Yeah, this is we’re selling a services business is very different than selling a product business. So a professional services business would fall into that category and this is really important, particularly if you’re on an earn-out or you’re rolling some equity. So those that are listening that might not understand those terms and earn-out says that you agree to a purchase price and that the proceeds come to you over time based on hitting some milestones or rolling some equity refers to that you sell a portion of your business, not all of your business, and you roll, quote-unquote, roll your equity into the New Deal with the intent of selling the rest of it or another portion of it down the road. So if you fall into those two categories, which the majority will one or the other or both. Who you’re selling the business to is really important because you have proceeds yet to come. So be really sure that you know what the terms are, that there are no unwanted surprises that crop up. You know, the buyers own the asset. Once you sell it, they’re entitled to do whatever they want with it. If you don’t agree with their plans, do not sell to them.
Sean Magennis [00:09:46] We will be right back after a word from our sponsor. Now, let’s turn the spotlight on collective 54 members who are making an impact in the professional services field, Collective 54 is the only national peer advisory network for owners of professional services firms who are focused exclusively on growing, scaling, and maximizing business valuation. Today, we have the pleasure of introducing you to someone I’ve known for many years. Renzi Stone, founder, and CEO of Saxum, an integrated marketing communication consulting agency.
Renzi Stone [00:10:27] Saxum is an award-winning 50 person integrated digital marketing and communication agency. I founded the company in 2003 to take on issues that are shaping lives, our communities, and the world. We’re obsessed for good, which means that we move mountains for our clients, tackling their most important issues. We are experts in energy and infrastructure, champions of social good, and passionately at work, helping disruptive innovators build better communities. Saxum as a proud nine-time Inc five thousand honoree. As a CEO and a leader, I endeavor to always add value with purpose. The world needs more of that.
Sean Magennis [00:11:13] Please get to know Renzi and other extraordinary business owners who are leading innovation in the professional services industry. Visit us at Collective54.com. Learn more about how Collective 54 can help you accelerate your success.
Sean Magennis [00:11:34] So critically important to understand who you’re selling to and what their motivations are. There are other mistakes to avoid as well. Every situation that you as a listener and boutique owner are going to face is different. However, these are the most common mistakes that boutique owners make. In an effort to provide immediate takeaway value for the audience, I prepared a 10 question, yes, no checklist.
Greg Alexander [00:12:01] You and your 10 no questions. Yes, no questions.
Sean Magennis [00:12:05] You’re gonna love me for these. Listeners, ask yourself these 10 questions. If you answer yes to eight or more of these, you’ll avoid making these mistakes.
Sean Magennis [00:12:15] Number one, do you know what you want from the sale? Number two, do you know what you are going to do after the sale? Number three, is your business attractive to a buyer? Number four, do you, in fact, have a sellable boutique? Number five, do you have a hand-picked successor? Number six, is the successor ready now to take over? Number seven, have you lined up an all-star team of advisers to help you? Number eight, are you prepared for the post-sale criticism headed your way? Number nine, you understand who you are selling your boutique to. And number 10, do you understand truly their motives for buying?
Sean Magennis [00:13:35] Greg, it’s been great to speak to you, for, for our listeners. If you are building a business, you could run forever. You are also building a business you could sell tomorrow. If you decide to sell, you want to do so on your terms. Give yourself plenty of time to avoid these common mistakes that we’ve shared with you on this episode.
Sean Magennis [00:14:00] If you enjoyed the show and want to learn more, please pick up a copy of Greg Alexander’s book titled The Boutique How to Start Scale and Sell a Professional Services Firm. I’m Sean Magennis. Thank you, Greg, and thank you to our listeners for being with us.