As many of you know, the court reporting industry is going through consolidation, mergers and acquisitions currently and the subject of exiting your business is a hot topic, for many owners.
The topic seems fairly simple, at first glance. You started your firm 25-35 years ago and now, it may make sense to get out and quietly walk into the sunset with a pocket full of cash!
Most of you started your firm decades ago and the thought of selling 30 years down the road never crossed your mind. Thirty years is a long time away and when I’m ready to sell, I’ll just sell my firm. The assumption was, of course, that there would be someone to buy your firm at your price, when you determined you wanted to sell. That’s not always the case.
The first question that we may ask you is when did you begin to think about an exit? If you are wanting out today and you started thinking about an exit last week, this is a different scenario than if you have been planning and engineering your firm for exit years in advance. Most of the time, owners have not planned or engineered their firm for the best possible exit because they assumed that it wouldn’t be an issue when they were ready.
When an owner exits a business, there are many, many considerations to be taken into account. It’s not always as simple as you might believe. Questions like:
- What is my firm actually worth to an outside entity?
- How would a deal be structured, if I were to sell?
- Is it a cultural fit with my existing firm?
- What will happen to my staff and reporters?
- Will my clients be treated in the same way that I have treated them through the years?
This is just a small sampling of questions that may run through your mind as you contemplate an exit strategy. Let’s try and address each question briefly.
What is my firm actually worth to an outside entity?
Probably not as much as you might believe it is. Most owners want to be compensated for that 30 years that they spent building their firms and the blood, sweat and tears that went into building the firm. Usually, the market is not concerned about those type of issues. They will evaluate a firm’s value, usually around EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) and then a multiple of that number to come up with a value that they are comfortable with. There are many factors to be considered on both sides of a deal.
How would a deal be structured, if I were to sell?
The structure can be different from one deal to the next. There isn’t always a standard deal structure. If you are offered $1,000,000.00 for firm, that $1,000,000.00 can be structured in many different ways over a period of time. It may be in an upfront payment or it may be structured over 3-5 years with a smaller portion being given up front and the remainder being paid out over a period of time to the owner. There may also be certain levels of revenue and earnings that are a part of the structured deal that could impact an owner’s payout over time. The main point here is that deals are created differently and structured differently based on an acquiring firm’s goals and directives.
Is it a cultural fit with my existing firm?
This is a valid question and concern for any owner. It’s important that the firm being acquired and the firm acquiring have a cultural fit with similar values. It’s to the benefit of both firms, that any transition to new ownership be as seamless as possible. It makes the most sense for the staff, reporters and the clients. Many deals have gone off the rail because there wasn’t a cultural fit and similar mindsets, moving forward. This is one of the reasons due diligence on both sides, is very important to the acquisition or merger being a success. The financial aspect is extremely important, but the cultures should mesh as well, and not be overlooked.
What will happen to my staff and reporters?
Again, this is a valid concern for an owner. You have built your staff and reporters over many years and they have become part of your family, in many cases. In an effort to create a seamless process, most of the firms are respectful of current staff and reporters and are not interested in anything that would be disruptive to any potential acquisition of your firm. Your staff and reporters have helped build the firm to the point where an outside entity would be interested in acquiring you. It would not be to the acquiring firm’s advantage to make wholesale changes to the very people that contributed to the success of the firm. Having said that, there may be some impact downstream, as it relates to an acquisition and it would dependent on many factors.
Will my clients be treated in the same way that I have treated them through the years?
The clients are always a concern on both sides of an acquisition. They are the lifeblood of the industry. That’s one of the main reasons that the cultural fit is so important to ensure clients remain. An acquiring firm is taking risks because there is no guarantee that clients will continue to be clients. As owners, all of you take the same risk with clients every day. You have no guarantee that a client that is with you today will be with you in a month. Everyone in the industry understands the value of protecting the client base as much as possible. This is an additional reason the due diligence is so very important in any exit strategy. Many of the potential negative issues can be avoided at the beginning, instead of putting out fires at the end.
What we have tried to illustrate is that there is not a “one size fits all” type of deal. There are many different factors in many different areas to consider before you exit. Educate yourself, as much as possible, to ensure you understand the process and the components of the process before you move too far down the exit pathway.
Unfortunately, many owners are not prepared and not ready to exit. If you are thinking about an exit, make sure you go into any potential situation as an informed and educated owner, with the right questions and the right attitude. Hopefully, you can walk away into the sunset with a pocket full of cash.
If you would like to have a conversation to further discuss this issue of exiting your firm, request a consultation.
ABOUT THE AUTHOR:
Terry McGill is a small business consultant and managing partner of Strategic Business Directs. He assists court reporting firm owners (and other businesses) with operational, financial, organizational, growth, marketing, sales, and exiting issues. Connect with him on LinkedIn.