Client Background
In 2016 the owners of a market-leading architectural-engineering firm engaged with Beacon Hill Equity Group to explore options for the sale of their business. The company had two owners and thirty employees. The two owners had started working in the business for the original owner, working overtime to come into full ownership of the Company. The original owner exited over a period of years, whereby, through 2016, he was still working in the business. Approximately ninety percent of the client’s business was focused on building renovation, historical renovation, and the reuse of existing structures, and ten percent of the revenue was derived from new building construction. The company’s revenue and EBITDA had steadily risen over the year.
Client Issues
The company’s strength and weakness at the time was its 99% customer base in Massachusetts / New England. Part of the reason the company had not ventured into other markets was that there was no formal sales program and they relied heavily on word-of-mouth referrals to gain customers. The Company had not committed the resources to master and participate in the Federal contract procurement process. Another challenge for these owners and exiting their business as they were both heavily involved in the company’s operations and wished to stay with the company post-transaction to aid in the continued growth of the company.
Planning Solutions/ Outcomes
After conducting an initial review of the owners’ financial and mental readiness using the Business Exit Readiness Index (BERI) survey, it was clear the owners were ready to continue working as stay-and-grow owners. Beacon Hill conducted a personal value gap analysis for each owner as well as a range of values for the company. The analysis concluded that at the high end of the valuation range, there would be enough money from an exit transaction to satisfy both owners’ exit needs.
The Beacon Hill team used the IEPA’s Summary ESS Report format to conduct both exit plans. Through this summary process, the conversation quickly turned to the exit options available for the owners to extract the illiquid wealth needed from the business to close each owner’s personal value gap.
The two owners approached the exit planning process with a desire to do for the existing employees the same thing that the original owner had done for them – transition ownership of the business owner time. There were five (5) key managers who had already been brought into the conversation around becoming owners at some point in the future. However, as the exit option analysis and conversations deepened, both owners began to question whether the five (5) person leadership team could really run the business and payout the inflated value of the company to make for a successful exit. The Company was significantly larger and more valuable than when they purchased it from the original owner. The planning process revealed this challenge, driving engaging and difficult conversations because the leadership team had an expectation of coming into ownership in the future.
Execution/ Transaction details
While these planning conversations were happening, the owners received an ‘unsolicited’ inquiry about selling the business to a larger, New York-based, private equity-backed industry player. Up until this point in time, the owners were not entertaining these conversations. However, the exit planning process started to help these owners realize that an external exit transaction/sale may be what is in the best interest of the company. The owners were coming to the conclusion that they needed to develop a plan whereby the company would succeed, independent of how and when they would get paid for the value. Having this new clarity, the owners asked the Beacon Hill team to assist with the engagement with the unsolicited interest to see if the interest ‘was real’. The owners wanted to know if the interest was credible before they turned their attention to the challenge of discussing the new direction with their most valuable employees.
Is the Interest Real?
In fact, the interest was quite real. The New York business was majority-owned and controlled by a New York private equity group. The private equity group had purchased the New York business a number of years earlier, held on to the leadership team, and set a plan to grow the value of the company through acquisitions, a common strategy for ‘platform’ investments by private equity groups. In order to execute the growth through acquisition strategy, the private equity group hired a ‘buy-side’ advisor who created a list of ‘target acquisition companies’ and the Company made that list. So, when the BHEG team engaged with the buy-side broker, it was quickly understood that the interest in the Company was well researched and ‘real’.
In fact, the New York business had a strong desire to expand geographically into the New England market. The challenge that business was facing was the parochial nature of New England relationships. And, over many decades, with an ‘internal transfer’ of key relationships from an original owner to the owners, the Company had the connections, reputation, and backlog of work that the New York business was looking for to execute on their expansion plans.
Transaction Process / Outcome
In April of 2017, the client accepted a Letter of Intent to sell 100% of the company to the New York business. The negotiation was handled primarily by the private equity group, but the CEO of the business was also heavily involved. The proposal outlined a deal structure that included a cash payment, employment agreements, and an earnout. The earn-out was in place to incentivize the owners to stay and to successfully transition the relationships. Fortunately, the BERI survey suggested that they were interested in continuing to work.
The hard part was going to be explaining to the leadership the change in direction in terms of the future ownership of the Company. The message to the leadership team was delivered with a lot of forethought, anticipating some hurt feelings and not wanting to lose key people. Most of the leadership team was able to understand that the sale to the New York business was the best option overall, for both the leaders’ careers and for the Company as a whole. Also, the owners would be remaining with the company so not too much would change in terms of the running of the business. More importantly, for the leaders with larger ambitions, becoming part of a national platform business created new opportunities for promotion, relocation, and to work on more challenging and exciting projects than if the Company stayed on the current growth path. In the end, most of the leaders stayed, except for one individual who had a strong desire and vision to be an owner.
Separately, the owners needed to adjust to working with (and for) the new ownership group. These adjustments were a little easier for the owners, primarily because they cared about, and were focused on, the overall success of the business, they learned that they could serve their clients in new and exciting ways, and the liquidity from the sale transaction closed their personal value gap, so they knew that work was optional and not required for their families’ personal, financial security.
The exit planning process helped prepare these owners for a transaction as well as gain the clarity needed to choose the ‘right’ exit option for the Company. Today, the combined companies have a new owner: an international business that is putting the company, its employees, and clients on a larger playing field and creating even better opportunities for all involved.