How to Sell a Professional Services Firm for Top Dollar
Pamela Dennis is the author of one of 2016’s best books on exit planning, so we’re super-excited to get her on the podcast. She has her own exit story to tell us about and then was able to package what she learned into a book that is practical and easy to read.
Pamela has been there and done it with her own business, and not just any business, a professionals services firm. Many say that this is the most challenging industry to get top dollar for. Firms are valued at 1 or 2 times earnings because more often than not the firm revolves around the owner and their intellectual property… therefore there isn’t much to transfer or sell. However, not only did Pamela engineer the perfect exit, she managed to achieve what for many business owners is the impossible. She used their intellectual property to license and monetize their professional services business. And what’s more, she has the most exceptional ability to put it into words – there are just so many great metaphors and easy-to-remember nuggets from this interview!
Some stats to start us off:
- 75% of small business owners have their retirement equity tied up in the business.
- 25-27% small business owners sell for the true value of their business, 20% just close the business all together.
- The number of small-medium business owners that are going to turn 70 in the next 10-15 years is going to grow 600% in 10 years and 900% in the next 15-20 years.
- Companies that spend 6 months or less selling their business only get 50-70% of the value on average.
Why do only 13.6% small business owners have an exit plan?
- Because they’re too busy.
- Because they think it can be delayed.
- It scares them because they don’t know what they’re going to do afterwards.
How Pamela’s exit plan was aided from the very beginning:
Pamela had a very clear vision of what she wanted. She said that her husband tells her that planning is in her DNA. That’s not the same for all of us! However, Pamela gives some great advise on how to put your thoughts to paper.
On one side of paper Pamela mapped out the absolute fundamentals of the business: “What it will be, what it won’t be, the kind of work we want to do, the kind of work we don’t want to do, the clients we want, the clients we don’t want.” This was the framework that helped the business build value year on year. It gave her a clear direction on where she was in relation to her vision for her future.
How was the business value built?
Because a professional services business doesn’t have hard assets, higher multiples on pre-tax income is always a challenge. The value Pamela and her firm got came from their track record of hitting double-digit growth targets every year, by hiring partners who wanted an equity position in a growing business, AND more importantly their ability to package their services into protected intellectual property (i.e. licensing out patented training programs),
What was the compensation structure for the partners?
Partners would get paid on a percentage of ownership, how much revenue they drove in the year. BUT the more interesting and more important thing they did was tie the executive compensation to how much intellectual property they had created and what the projected revenue was in the next two years. This was how to get people to stop working on the now and look at the future.
Pamela’s advise here is critical. Her experience was that if you don’t build a structure like this everyone in a firm will always look at non-billable hours as time wasted. However the non-billable hours that were spent on the intellectual property building were the exact thing that made their firm worth the top dollar!
“You need bifocals. First to look at what’s right in front of you, i.e. this year’s goals. Second you’ve got to have distance vision i.e. where does my operating plan take me 5 years from now?”
Why targeting a particular buyer is so important:
A certain ‘type’ of buyer can completely change the narrative of your exit plan/financials. Pamela defined buyers into three categories:
- ‘Strategic’ buyers who are looking for synergies between the business for sale and the areas in which their current business intends to grow.
- ‘Financial’ buyers who intend to flip the business at a profit.
- ‘Ready-to-wear’ buyer effectively buying themselves their next job.
Wise words for the road:
[clickToTweet tweet=”“The secret of good exit planning is start early'” quote=”“The secret of good exit planning is start early and stay disciplined. Make sure what you do year on year is leading you on the same highway of that exit.”” theme=”style2″]
[clickToTweet tweet=”Look what motivates you, not what activities you love to do… what is it that makes your heart sing?”” quote=”Look what motivates you, not what activities you love to do… what is it that makes your heart sing?”” theme=”style2″]
[clickToTweet tweet=”“The test of a successful sale is, a year later, can you say ‘I’m happy?’”” quote=”“The test of a successful sale is, a year later, can you say ‘I’m happy?’””]
[clickToTweet tweet=”I want to me happy a year later!” quote=”I want to me happy a year later!” theme=”style2″]
How to contact Pamela:
Website – www.pameladennisphd.com
Email – email@example.com
Link to Exit Signs the book – HERE
Pamela Dennis Bio:
For 30 years, Dr. Pamela Dennis helped some of the world’s top leaders successfully lead their organizations—from global Fortune 100 companies such as GE, Merck, JP Morgan, GM, BHPbilliton, and Telstra to emerging companies and closely held partnerships in private and public sectors. She speaks to international and national organizations on leadership and change, with the emphasis on leading transitions. Pamela is affiliated with the Women’s Council of the Leeds School of Business, which supports developing women in leadership at the University of Colorado, and holds a PhD in Organization Development and Education from the University of Colorado. Pamela lives in Boulder, CO, and part time in San Diego, CA.
Brought to you by Ryan Tansom of Intentional Growth