In this article Mark shares how he knew when to be ready to sell his business and how he and his team prepared themselves for success. Read on to learn how to recognize the right time to sell and how adopting the best engagement style can make all the difference to the final price.

Inbound M&A interest

If you’re running a services firm of any kind, you’ll receive calls from bankers or brokers asking if you’re interested in selling. Chances are they’ll tell you they have a ton of prospects on their books looking to acquire exactly what you offer. Be cautious in your excitement. Once reeled in, things could go quiet for a while.

Most of this traffic is long term in nature. It’s usually stirred up by intermediaries looking to build relationships with companies that might be ripe for acquisition a few years down the road. But every now and then, one comes in that stands out.

Toward the end of 2020 I got such an enquiry. It came from a senior M&A person at a top 5 technology consulting firm. We had chatted on and off over the years, so we had a relationship. In our initial call, I shared our numbers on revenue, growth, and margin. This was enough to show how well we were doing, despite all the market challenges at the time.

Recognizing the right time to sell

I always use Geoffrey Moore’s technology adoption model, and in this instance it helped me sense that we were nearing the peak of the market wave we were riding. Initially created for very specific innovations (such as smartphones, EVs, AI chatbots) the model looks at how a market is forming and growing for that particular technology. This model follows the development of a market from early adopters through mainstream buyers, to laggards.

I found that applying Moore’s model to our service offering worked well. In 2017, when we started working on product-minded development (selling outsourced product teams vs the traditional developers), nobody was talking about it. By 2020, Gartner had written about how it was one of the leading areas of growth for firms.

With larger firms starting to buy up small and medium businesses doing this type of work, I could see the peak was coming. This created a fork in the road for Nexient. We could (if we were lucky) sell our company at a great valuation. Or if we didn’t, we’d be forced to once more reinvent ourselves to a valuable offering in whatever the next wave would be. Knowing how hard we had worked to set ourselves up for this wave, I decided we should explore what the market might offer. I also knew that reinventing ourselves at our new, larger size would be really challenging. When I discussed this with my board, they were skeptical that the market was significantly higher than in 2019 when we’d been close to an alternative acquisition. They weren’t that interested in pursuing a sale.

Getting to an offer

I also had a sense (without any proof) that valuations were higher than they had been before. Bankers had previously told me that in a typical market, a firm like Nexient could expect to be offered 8-12x our EBITDA (annual profits). I was curious to find out where an offer might come in for us.

Using everything we’d learned from our 2019 offers, my team and I had a number of meetings with the potential acquirer. We managed to navigate our way to an offer in writing. Getting that offer completely changed the trajectory of the company. It was almost three times the size of the guaranteed portion of the offers we'd received in 2019, with the multiple on EBITDA significantly higher than 12x.

When I took this offer to my board they quickly changed their tune. We began to dig into the process straight away, deciding to negotiate the offer up. Our goal was to get it to 10% higher.

Adopting an engagement style

When you start negotiating any sale it is important to consider the engagement style you should adopt. I'd decided ours would be to show interest and respect, but not desperation. I’d answer every email within a day and never follow up more than once. This could be excruciating if the other side took many days to come back, but it was important to set the right tone for our level of interest, hopefully helping us maximize what we could get out of the deal.

After a few rounds of negotiation, we were able to get the offer up by about 7%. Since we had internally agreed on a 10% target, I sent one final email asking for the full 10% increase. I made it clear that if they hit that price, we’d have a handshake on a deal, moving to sign an agreement to proceed with diligence and the transaction.

At this point, the buyer went silent on me. No reply for three weeks.

(To be continued in my next article….)

Preparing for sale

Selling a services business is not just about turning a profit then putting yourself on the market. I mean, you can do that, but chances are it’ll take a heck of a lot of time to find a buyer at the price you want. So you’ll probably end up selling for less than you’d hoped. Here are some things you can do to prepare yourself for a more favorable sale when the time is right:

• Engage with inbound M&A interest - Throughout my time leading Nexient, I always replied to inbound M&A interest. I didn’t really know much about the process to begin with so used these interactions as an opportunity to learn more. I also found that as I talked to people, I’d hear about what the market was doing and how others were faring. Having built up this experience over many years was incredibly valuable, particularly when we got to the point we had serious interest.
• Differentiate large, strategic buyers vs bankers - I learned a lot from talking with bankers, but when a strategic buyer (typically a much larger consulting firm) wanted to talk directly, that was the highest quality lead. It’s probably rare, but if what you are doing in the market has got the attention of a strategic buyer, you’ve got a great chance of getting an offer.
• Understand where you are in the tech cycle - Small and medium consulting firms are great at innovating and finding new ways to deliver value to their clients. Larger firms are constantly watching to see which trends and offerings are doing the best in the market. In 2016, we intentionally set out to move from staff augmentation to a much higher value service offering. For us, selling work as whole product teams was key to delivering more value. It also aligned with what most of our enterprise buyers were trying to figure out. By 2020, it was clear that the market had developed a number of firms who worked in this way, with all the big firms moving there too. We could tell we were near the peak and valuations and multiples confirmed this.
• Look to sell near the top of the cycle or get on the next one - If you are going to sell, the ideal moment to do so is somewhere near the peak of your tech cycle. It takes an incredible amount of good fortune to hit this part of the cycle, but during your differentiation planning, you will have a chance to make bets. Ultimately, you need to build a great business and be able to keep growing until you see the market hit a high. This can take many years, so it’s definitely a long term play.

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