An exit strategy is a process, not an event.
For architects and engineers who love their work and enjoy successful practices, exit strategies do not land among their top priorities. Yet it is a crucial element of practice management. It takes time and energy to maximize business valuation. It takes time to find a suitable buyer. And it takes time to consider the impact on employees, clients, and the firm’s capacity to garner business. Here are a few thoughts to help set goals, assess options, and develop a plan.
Setting Goals for Your Exit Strategy
The planning process for an exit strategy starts with a clear vision for the end game. A few of the questions to consider include:
- When are the owners looking to get out of the business? Will their departures occur at the same or different times?
- Do the owners expect the business to continue? If so, how will the firm sustain its reputation, client relationships, and core competencies?
- Have the owners cultivated employees who are capable of taking over the business?
- Do the owners need to “cash out” in order to fund their retirement? If so, how will the sale of their interests impact the firm’s financial health?
- Do the owners want to participate in the business after selling their interests?
The “right” endgame for the firm will be at the intersection of the realities of the market, the needs of the business, and the owners’ aspirations.
Considering Your Options
There are three types of exit strategies for most closely held companies: liquidate, outside buyer, or sell to employees.
A liquidation strategy calls for a gradual retreat from the business to satisfy outstanding obligations and provide for the sale of tangible assets. While in some sense “simple” due to the absence of a negotiated sale, it leaves clients and employees “hanging” and does not support the realization of brand equity built over time.
Outside buyers can be difficult to find, especially given the technical nature of the business and the dependence on human capital. It may take time to find a buyer with the requisite capital, cultural fit, and expertise to manage the practice and retain key staff.
A majority of AE firms prefer to perpetuate the organization through internal ownership transition rather than with an outside buyer. If the bulk of opportunity falls with employees, owners need sufficient lead time to help employees finance the purchase and establish their credentials in the marketplace. They also need time to transition long-standing client relationships in order to avoid an untimely exodus when the principal(s) depart.
Developing the Plan
We suggest that owners surround themselves with trusted advisors who know the AE industry as well as professional services. A team of advisors can illuminate the path to sound personnel, practice management, and financial decisions that will reap the greatest valuation at a future date. They can balance the needs of the owners with the ongoing requirements of the business. And they can help both sides of the transaction manage their respective cash flows, tax liabilities, and overall financial well-being to best advantage.