Who will buy my Professional Services business?

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.

Trade Buyers

Who are they?

Typically, larger Professional Services businesses with access to capital seeking a growth strategy that includes acquisitions.

Trade Buyers can also come from adjacent sectors, and are interested in Professional Services businesses due to their market positioning and access to clients. This includes business in Engineering, Media, Product Development and more.

Why do they buy?

They will be interested in your business for several reasons, for example:

• Scale. Growth through acquiring the same skills from competitive businesses like yours
• Geography. You have a significant presence in a country or region where they want to establish themselves quickly
• Enhanced Proposition. Your expertise and experience complement and enhances theirs
• Client relationships. You have strategic client relationships that they need

Advantages

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.

They are also 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.

What to be aware of

Trade Buyers will run a process which will be detailed an onerous on you and the team. Make sure you have the right support and avoid distractions from the main business operation.

?They will acquire 100% of your business, and offer a combination of cash up front, 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 earnings from the sale.

?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. Be aware and prepare for it.

Last, a larger business will bring new and more complex processes, around financial and commercial matters for example. You and your team will have to get used to operating in that type of environment.

Finance Investors

Who are they?

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, including low capital requirements to run and grow, potential for high growth rate, and for large profit production in the form of cash.

Why do they buy?

A Financial Investor will look to:

• Improve the returns on their invested capital through well-run businesses with healthy profits and good cash-flow
• Support the inorganic growth of another business in their portfolio. In this case, your business will be a "bolt-on" acquisition, fulfilling a need likely to be on the list of Trade Buyers' reasons above

Advantages

They will run a faster and smoother process to invest, this is their job after all.

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, their aim is to help you improve the operation of the business so that it runs better and grows quicker and more profitably.

What to be aware of

Financial Investors will likely be able to negotiate harder, as this is their job and also are not pressured by the same strategic needs that Trade Buyers may have.

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 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 when discussing with potential Financial Investors, as it can provide very much welcomed objective alignment with the investors.

A member of the Financial Investor team will join your Board. This is a great opportunity to work with them closely and help push the business ahead. Therefore it is important you feel you can work closely with them. Make sure to check this thought the process.

Decision power may change after the investment is made. For majority investments it most certainly will. You need to be able to work with that and the potential outcomes of it, in relation to business decisions relating to strategy and further investment.

Management Buy-Out

Finally, it's worth considering the merits of an Internal Buyer or a Management Buy-Out (MBO). This is not a new buyer type per se, 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 lower 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.

That said, 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.