In this article Mark tells a story from 2019 when he was very close to selling the business he’d spent five years turning around. After a lot of hard work and many discussions with his board he received two offers on his desk, only for the board to then decide not to sell. Read on to find out why they decided this and what Mark learned from the experience.

Four top tips on selling your consultancy

How do you know when to sell a services company?

When I took Nexient’s reins in 2014 I knew this was my end goal. But if you’ve read any of my articles from this time you’ll know that I was lucky to keep my job in those early years. Our results were not great to begin with so selling wasn’t really a topic I needed to spend much time on. I would have to turn the business around first.

By 2019, we had started growing the company enough that it seemed worth thinking about. We were on track to deliver double the annual revenue of our low point at the end of 2016 and beginning of 2017, and by the middle of 2019, I started receiving some serious interest.

Buyers from abroad

One of the things that was new to me as a first time CEO was all the outreach from bankers looking to represent us in a sale. Occasionally, I’d also get a message directly from a strategic acquirer - a larger services company looking to buy someone like us. In mid-2019, I got transatlantic inbound interest from two potential strategic acquirers.

What made them stand out was that they were running a similar model to ours, utilizing cross-functional software development teams in the same market as their clients (rather than the more typical offshore outsourcing model that almost everyone in the industry uses). One of the companies was in France and the other was in Italy. Both were looking to expand into the US and wanted to acquire a platform on which to build their US presence.

Platform vs tuck-in acquisitions

People in the industry often differentiate between “platform” acquisitions and “tuck-in” acquisitions. A platform is a company large enough to have a proven management team and scalable operating model that can be used as a base for further acquisitions. A tuck-in is typically smaller and doesn’t necessarily have a complete management team or scalable model. Tuck-in acquisitions will often have a lead in a new area or technology that makes them valuable to buy and merge into a platform. The acquiring company hopes that this will allow the platform company to begin to thrive in that new area. Similarly, the hope is that the tuck-in can begin to scale within the platform. This model is the basis for what many private equity firms are doing today when they execute a “roll-up” strategy - buying a platform and then consolidating multiple tuck-ins into that platform.

At the time, the rule of thumb was that a platform company would be doing more than $100m in revenue and a tuck-in around $25m or lower. We were in the $65m-$70m range in revenue. This meant we could well be in no man’s land.

Meeting with potential buyers

We had a number of meetings in the US with the potential acquiring firms. Both were interested enough to invite us to Europe to meet their management teams and owners. Since Nexient and all of its clients were 100% US-based, this was a welcome invitation for me and a couple of people on my management team. We were able to line up a visit to France, Italy, and Germany for one week to visit multiple offices of each of the two firms.

We told both of the firms from the outset that we had a conversation going with the other one. We also told them that we needed to coordinate our trip to Europe to visit both in the same week. This was intentional. Whenever you are exploring a potential acquisition, you are much better off having at least two parties that are seriously interested. It keeps both focused on making their best bid and gives you a sense of what the market value of your company is.

Discussing selling with the board

I had spent time with our board prior to the trip to ascertain whether they’d support selling, and if so, at what price. We had started the journey with the intention of selling, so it really came down to when is the right time and what is the right price. We discussed a possible range and agreed on what we’d like to see if we were going to sell now.

The meetings in Europe were exhausting but they went really well. Both companies made us an offer. Looking back on the offers, I can see that they reflected our position in no man’s land. Both firms offered us an up-front purchase price which was lower than the bottom of our range we were hoping to get, plus an “earn-out” over several years. Earn-outs are typical in services company acquisitions. Some or all of the value of the acquisition is held back for a few years and only paid if or when the team hits set financial goals. In the case of both deals, if we sold the company and kept to our plan, we would get a payout at the end that would bring the total purchase price to the high end of our range.

I’m a bit of an optimist, so when I looked at the offer, I saw us hitting our targets and getting a great overall payout. When we first talked with the board, they were also excited by the potential price if the company hit its targets. After we returned and got both offers in writing, we went through at least two weeks of significant discussions. In the end, the board decided not to move forward.

From the board’s perspective, as soon as the deal was done, the company would be wholly owned by the acquiring company. The board would have no control over the company at all going forward but still be dependent on the management team sticking around for several years and delivering the plan in order to see the higher end of our range. From their perspective this was just too much of a risk.

What I learned

The team and I had been really excited about the deal and all the possibilities it brought, so it took a while to get over the board’s decision. However we learned a ton about how to navigate the process of exploring an acquisition and how to best present the company in these situations. When we revisited these types of discussions later in the firm’s growth, we were much better at presenting the company and at qualifying whether a potential acquirer would be a good fit.

Some of our key learnings were:

• Explore acquisition opportunities early - we benefitted greatly from having these discussions before we really set out to sell the company. Most people (or at least first time CEOs) don’t have experience in all the facets of mergers and acquisitions. I found that the best way to get this experience was to explore deals like these two.
• Have more than one potential acquirer in discussion - if you are not working with a banker who is getting multiple parties to look at your company, it really benefits you to have at least two inbound acquirers that you are talking with. It gives you a chance to push both and to understand the market.
• Align with your board early on expectations - try to be as specific as possible so that when you get to offers, you are aligned. I went in to the main part of the discussions knowing what my board was hoping to get. But I didn’t know enough this time to ask their view on every scenario. It would’ve been helpful to know about structure vs total price and if they saw some of their set range coming from an earn-out.
• Be ready to work lots of extra hours - having these discussions is incredibly time-consuming. You need to keep the business running and explore these deals in parallel. We were able to pull it off, but it was a really taxing time. Only take on exploring deals if you and the team can separate it from your day-to-day responsibilities and keep both moving forward.