Timing Your Exit: The Paradox of Price Maximization
Executives in the architecture and engineering (AE) industry often find themselves contemplating the delicate balance between maximizing personal gains and ensuring their firm’s future success. It reminds me of Sundays spent on the golf course with my grandfather and his friends, where amidst friendly wagers, one gentleman, after losing a bet, would always say, “My goal is to spend every penny of my money before I die, and if I die on Tuesday, then I will have timed it perfectly.” While his sentiment is lighthearted, the pursuit of “perfect timing” resonates with many in life and business.
AE firm owners often prioritize perfect timing when it comes to a strategic exit. They often enjoy a comfortable salary and bonuses, and know their owner’s distributions will likely decrease significantly upon relinquishing ownership. Their goal is to sell their firm, work a few weeks, and then take their “last ride into the sunset.” While delaying a sale until retirement seems logical to maximize these benefits, it oversimplifies the complexities of mergers and acquisitions (M&A) in the AE Industry.
Buying the Future
To understand why coincident retirement and a firm sale may not be optimal, one must view M&A through the buyer’s lens. Buyers are not purchasing the past but investing in the future. At its core, valuation is the sum of future cash flow, discounted by market-adjusted rates and the risk of not receiving those payments. While the past is often used to inform future projections, this process breaks down when there will be significant changes in leadership.
As a leader in your organization, you can either transition leadership well before the sale or remain the leader after the sale. If your organization does not have an experienced leadership team, the buyer faces uncertainty about whether the remaining staff can effectively manage the business. Absent proof, the buyer will most likely take substantial discounts in value, knowing they may need to replace the leadership function. Leadership stability and a roster of capable people who can step (or already have) into leadership roles are highly valued by buyers.
What’s Talent Got to Do With It?
The importance of talent in AE firms cannot be overstated. The industry needs more individuals with technical expertise and the essential soft skills required for effective organizational management. Without talent in place for the future, why would a buyer pay you a market-based value when you lack a key ingredient that made the firm successful in the first place? Owners often believe that the best answer is simply transitioning leadership in the firm. While the answer may sound easy, the execution often is far from it. More often than not, a lack of future leadership is why a firm is contemplating a sale rather than an internal transition.
If a sale is your preferred path, the best, and sometimes only, option is to sell well before you plan on retiring. Buyers typically prefer owners to have a 2 – 5 years tenure after closing. This timeframe allows for the continued smooth operation of the business and provides the buyer with a substantial runway to identify and train future leaders. A longer runway mitigates the immediate risks associated with an acquisition and can mitigate potential discounts from buyers wary of inheriting a rudderless ship.
Next Steps
As we discuss the complexities of ownership transition, it becomes evident that the timing paradox requires an owner’s personal considerations to be viewed in the context of the transaction’s strategic imperatives. At SN, we believe in starting with the end in mind. Our experience shows that internal transitions can take 5 -10 years to complete, and external sales require 3 – 5 years, including the sale process and leadership transition. Timing the start of a sale process is determined by working backward from your desired retirement date.
Father time remains undefeated, and waiting too late to begin a transition or sale process can limit your options and, ultimately, the value of your firm. If you know how to program a VCR or can identify a floppy disk, it is likely time to begin having discussions about your ownership transition process. It is always better to begin a plan a little early than wait until your choices are narrowed for you. We are always ready to discuss you and your firm’s needs and find a tailored solution to help you achieve your goals.
