Who will buy my professional services business?
Updated: Sep 26, 2022
As your business grows and more parties are interested in it as a potential acquisition or investment, it's good to know who those investors may be and want to expect from them.
Professional Services businesses can raise interest among the investment community at different points in their lifecycle. Understanding when you are best placed to engage with these conversations will get you the best results.
Keep an eye on:
The financial performance of your business - a good "marker" for mid-market Professional Services businesses is the £1m EBITDA threshold. Keep in mind that this is just an indicator. You may be better off building a more profitable business, or indeed, you may find your proposition is investable at a lower profit number. Either way, ensuring your business is well run and profitable is the first and most important thing.
The buyer's need and the market - the right conditions can create a bull market for businesses like yours. In this scenario, keen investors compete to gain market or competitive traction through acquisitions. Being well placed will allow you to command a premium price for your business.
So who are the buyers, and what are they after?
Generally speaking, there are two buyer types: Trade Buyers and Finance Investors. Below is a table with details about both.
Who are they?
Typically, larger Professional Services (PS) businesses with access to capital seeking a growth strategy that includes acquisitions.
Trade Buyers can also come from adjacent sectors, and are interested in PS businesses due to their market positioning. This includes business in Engineering, Media, Product Development and more.
Private Equity houses, interested in your business as a financial investment to add to their portfolio of businesses.
Some of the key characteristics of well-run Professional Services businesses make them very attractive to Financial Investors. Some of these include low capital requirements to run and grow, potential for high growth rate, and for large profit production in the form of cash.
They buy because
They will be interested in your business for several reasons, for example:
A Financial Investor will look to:
If your business fulfils a critical strategic need, Trade Buyers will pay a premium, making them potentially the highest payers.
A Trade Buyer can provide an excellent operating platform for the growth of your business through cross and upsell into a much larger pool of clients.
Trade Buyers are better placed to understand the nature of your business, and therefore the importance that preserving essential aspects of its culture and operation have to its future performance.
They will run a faster and smoother process to invest (this is their job)
You will not be integrated into other businesses unless you are a bolt-on acquisition, adding little disruption to your current operation.
On the contrary, part of their aim is to help you improve the operation of the business
What to be aware of
A Trade Buyer will acquire 100% of your business and offer cash upfront, phased payments (earn-out) and re-investment into their business.
Delivering an earn-out under changing conditions can be a challenging task. Try to understand and control as much of this as possible, or you may jeopardise the business results and, therefore, your sales earnings.
You can expect Trade Buyers will eventually integrate your business into theirs, realising cost saving through synergies. This will create change and may bring unwanted disruption.
A larger business will bring new and more complex processes, such as financial and commercial matters. You and your team will have to get used to operating in that type of environment.
Financial Investors will likely be able to negotiate harder, as the same strategic need does not drive their investment.
Once invested, your business will be part of an investment portfolio, likely managed according to the timelines of the fund cycle (typically 3 to 5 years). You have a timeframe to make your targets happen before the business is refinanced or sold. This could be an advantage as it provides a clear horizon for another capital event—worth considering your plans when discussing with potential Financial Investors.
A member of the Financial Investor will join your Board. This is a great opportunity to work with them closely and help push the business ahead. You must be able to work with them and make sure this is the case throughout the process.
Decision power may change after the investment is made. It certainly will for majority investments, so you need to be able to work with that and the potential outcomes of it, like strategy and further investment decisions.
Finally, it's worth considering the merits of an Internal Buyer or a Management Buy-Out (MBO). Again, this is not a new buyer type but rather a combination, as it will be members of your existing team likely backed by a Financial Investor.
Management Buy-Outs are often overlooked as exit strategies for mid-market Professional Services businesses, while they have many advantages. A well-established management team, independent of the original founders, can find financial investors (PE, debt or a combination of both) to support their ambition to grow the business further, bringing the necessary capital into the business to buy out current shareholders who want to exit, and further invest in the growth plans. This provides a clear and smooth exit strategy for the founders and a path forward for the business and the team with less risk for disruption and all the upside opportunities that this change and associated investment can bring.
So how do I choose what is right for me and my business?
Market timing and the key markers of your business, like revenue and profitability, are critical to deciding what type of buyer will be interested and may work best for you and your business.
A key part of the answer lies in your personal goals and ambitions, as each exit route provides different options for the founders. Make sure you have thought about these before engaging in a process.
This is why exit planning is essential to keep you growing your business in the right direction and enabling those goals. And as you approach them, you can start exploring available options to you, with their upsides and constraints and make an informed choice