Selling Your Consulting Firm: Lessons from the Trenches

You’ve been running a business. Maybe you started it, maybe you bought in and grew it. You have enjoyed participating in the best capitalist economic system any nation has to offer on the planet. Now you have an opportunity to sell your consulting firm. What is next?

Whether you’ve been actively marketing your business for sale, or an unexpected opportunity presents itself, you have a lot to think about. Maybe you’ve been running it all yourself, maybe you have some business partners. Here are some lessons learned. Some of these are from direct experience, some are gleaned from friends and peers in similar situations. None of this isn’t anything you can’t get from a few MBA classes or a mergers-and-acquisitions (M&A) workshop. But Army lessons die hard, and I still can’t do any significant operation without writing up an after-action report.

I was offered partnership in my privately held consulting engineering firm in 2004 after a yearlong Afghanistan deployment. Apparently, absence can make the heart grow fonder! I kept an ownership position for 18 years. We ranged from four to six principals as younger owners bought out older owners. We dabbled in partial ESOP ownership. I worked there over 20 years before selling. We grew, we had many more up years than down years, and business was comfortable. Nearly every year in we were approached about a merger or outright buyout. Usually, it did not go far. Sometimes the conversation progressed a bit but never culminated. We had a good thing going and it always boiled down to: nobody presented a better deal than our current operation offered.

The basic items to know are intuitive: you (singular or collective you) know your business, its place in the landscape, your strengths, weaknesses, assets, and threats, better than anyone. Stick to that mantra, no matter what others start telling you. Yes, a business is only worth what someone else is willing to pay for it. That doesn’t mean you should not advocate for yourself, walk away if the deal is wrong, or double-down into negotiations if it does feel right but needs further parsing out. 

You will need outside help, attorneys and accountants at a minimum, so ensure you have good ones. If you get started on the sale process and get that gut feel that you need outside counsel, it’s likely past time to get outside counsel. 

The following are key for every seller to understand.

The Philosophical

You’re about to embark on a project that will take many more hours of each principal’s time than anticipated. You must also keep the business running along the way. So, if you take your eye off day-to-day business, it will hurt you, sale or no sale. Plan accordingly with time and resource management, decision authority, dividing up principal research and responsibility, communication duties, questions, milestones, etc. 

For instance, we closed very late in a calendar year. September-December was very hot and heavy with discussions and negotiations. Several times either party nearly called it off. I zealously guard my family time and used much of my PTO every year. But this was the first year I did not take a November vacation this century. I wanted to make sure I could look back on the deal (or no deal) and say I did absolutely everything I could toward the right answer. I’m no rainmaker and certainly no accountant, but I like to think I helped usher things along, interpret, explain, and keep all the various personalities and motivations together during our process.

Don’t get your hopes up. Keep in mind that this deal may stop and evaporate at any time, so plan accordingly. As business partners, no matter how far along in a deal you get, commit to staying together and keep working/growing the business after these buyers move on. Make this commitment to each other early in the process. Learn everything you can about the suitor and the process along the way, no matter how far you get. Keep your skin thick and learn what your business looks like from the outside in, perception is reality, especially in the M&A world.

If the deal skids to a halt, give yourself a cooling off period to dissect what happened. It will be depressing; any way you slice it. Give it a week or so, but you will need to keep things moving per the commitment previously discussed. You may learn some lessons and make some accounting/structure adjustments that could pay big dividends in the next M&A discussion. Some firms may learn that parts of their years-old business structure have nuances that may be seen as red flags. These might be fixed with some simple republishing of documents and tweaking of operations.

Given the possibility of the deal stopping, or potential for misunderstanding by staff, I cannot stress enough to keep things as confidential as possible for as long as possible.

Whether or not you are looking to sell, at least one non-employee outside director is a fantastic idea for any firm. Someone generally familiar with you and your business but outside your four walls can provide great perspective. Self-aware engineers usually know that we may not be great at finance. It was nice when we had an outside, finance-minded director brain to pick at nearly every juncture and discussion. An outside smell test on parts of a deal that you might be too close to see the forest through the trees can prove invaluable.

Ask your suitor if they ever bought anyone else. If so, and the sellers are still around, ask to talk to them about how it went, positive and negative.

The Functional

Know these definitions and the various ways to define the same term. Working Capital (WC), in particular, seems to be defined a host of different ways, and everyone running those numbers wants to stack the deck in their favor. Intuitively, small business owners assume WC should be the money that stays in the bank to pay the bills in the first couple months post-merger. But buying companies usually want it to be a much bigger number than that, from you. They’ll drag out all the flowery accountant language to back up their position. At the end of the day, it’s a factor in deciding the bottom-line purchase price because WC gets carved out of it. Don’t let it be an 11^th hour topic, try to flesh out the WC philosophy and rough numbers early on.

Earnings before interest, taxes, depreciation, and amortization, or EBITDA is standard stuff. Don’t even begin discussions before knowing exactly what yours has been and the factors affecting it. Know why it went up or down. Know what it should look like with your future projections.

Multiplier (the number they multiply by your EBITDA to get your value) is probably the most subjective number and the number you’ll want to spend as much as you can on negotiating upward. If you can only research one thing, research multiplier metrics. Shoot for the highest number you can justify. Googling “multiplier value accounting firm” will get good information, if that is your wheelhouse. Various brokers in your industry likely have good publications regarding these terms. If you want to pay for an outside consultant or broker to help you, maybe just have them give you a short class on how the multiplier works and standards throughout the industry. Even if things are tight, that would be money well spent.

Earnout is “we’ll pay you the rest after you hit these numbers next year,” or the next three years, or whatever. I recommend avoiding it.

Escrow thankfully has a fairly standard definition but don’t confuse it or mix it with earnout. It is possible to have zero earnout but still sock some of the purchase funds away in escrow. That’s fair, the buyer wants some financial protection that you haven’t buried some huge skeletons that will cause them problems post-merger. I think 20% or less in an escrow that gets drawn down over 12-18 months, as your anticipated billing comes in and nobody sues you, is pretty common. Be sure to keep enough cash up front to pay your taxes!

Work-In-Process (WIP) is an asset. Consulting firms’ WIP is often a nuanced discussion that you need to ensure their (and your) accountants understand. Often, for public owner clients, we ground through a project and didn’t bill it until the funds were in place and we knew they could pay. Then we sent a large bill even though the work was completed months prior. That blew some accountant minds. They may expect you to always bill in the same month as the work was done, or at least build the bill and accrue (account for) the income. They might see carrying that work effort as some sort of a red flag. Prepare to explain your billing cycles. Doing all your work and then getting paid at the end was not unlike agriculture. Do not use that analogy with accountants. Farming businesses terrify accountants. Again, keep thick skin because these guys won’t care for your folksy most-of-us-were-farm-kids opinations. Like it or not, you are now in the Wall Street sandbox, at least until the deal is inked. Don’t pretend to be something you’re not, but also know when to keep quiet!

Net revenue looks better than we small firm owners intuitively think. I mean, if you grow your business and your net revenue but just pass most of the work and money through to your subs, why bother, right? Big firms don’t think that way. Larger net revenue always looks better. Even if it doesn’t change your EBITDA, it will bolster your case for a higher multiplier.

Be able to justify your projections with contracts, commitments, history, hard numbers, etc. Many firms just throw a percentage onto their annual numbers and consider that their projection. If you have hard data that improves that picture, wave it around all you can. If you have a timeline of growth from your company’s inception, and it generally goes up, definitely wave that around too. This helps you say “see, we know what we’re doing, and we intend to keep doing it with or without you.”

If the deal does collapse, consider getting a hard outside evaluation for your own use. If you are a full or partial ESOP company, you must do this annually anyway. You can use this to dig into the calcs and generally evaluate yourself on a regular basis in subsequent years. Then you can have a general number for subsequent suitors: “If you can’t meet or beat this number, let’s all just stay respectful peer competitive firms and save everyone the time…” 

Explain and advocate for your contracts. You might do mostly lump sum, time-and-materials, on-call, handshake, or other types of contracts. Don’t assume the seller knows how or why you structure things that way. You may be so close to all your day-to-day contract language that it’s difficult to explain in terms of other contract vehicles out in the wild. You must tell the story, likely many times, of why your system works best for you. 

Questions to Ask (Them and Yourself)

Do you have a current or recent outside valuation? If someone showed up tomorrow and wanted to buy into a partnership with you principals, or buy somebody out, what would you do?

Are you or are they an employee stock ownership plan company, or ESOP? If so, they generally have an annual valuation. What happens to the ESOP and its participants after the sale? If you are winding down paying out the ESOP, who handles that process? Who pays the attorneys for filing the ESOP termination post-sale, the buying company or the old owners? How will all this work with the new company’s ESOP?

How much new company stock are you expected to take, typically as a percentage of your individual proceeds. This amount may be seen as your commitment (or not) to stick around. How much stock versus cash can you tolerate? What must you learn to answer that? Are they outside-valued, or their value merely set by their board? Are they publicly traded and that value is set by the market? How many different business entities do they operate under, do they have a separate holdings company? Which company will you get stock in? Do they have a parent company? Who will you have to deal with post-merger?

Will different principals be allowed to take a different percentage of new company stock, or will you all be looked at the same and expected to take the same deal?

Are you an S corporation or a C corporation, are you going to change from one to the other? Will your business entity evaporate? Or will they keep it incorporated, just wholly owned? Is the buyer an S or C corp and what does that look like with respect to your new stock. 

Ask your personal and business accountants about tax ramifications top to bottom, income vs. capital gains, and industry-specific tax credits. Be aware of sunsets and expense amortization rules that may be surprisingly dynamic.

I do not like the idea of structuring an earnout because it seems to keep the two companies separate, perpetuating an “us vs. them” set of books if not mentality and operating posture as well. I always thought the whole point of a merger was to merge and go all-in with the “one plus one equals three” new company synergy.

Will they expect you principals to take non-compete agreements? If so, how long, and how focused is it? They’re buying you for your ability to design green widgets. If you leave, can you design red widgets? Are you prohibited from designing widgets or anything widget-adjacent at all? Is it something in between?

What level of strategy, HR decisions, principal duties will you still do post-merger? Will the new firm support your budding plan to design orange widgets, or do they want you to just keep your head down and crank out those green widgets? Do they want you around at all?

What do the former owners need to stick together to decide and fund? Who decides the escrow savings vehicle? If a former owner leaves, do the others get visibility on their terms? Will you be allowed to re-file past old company tax returns if tax law changes in your favor? Will the new company re-file anything if tax law changes in their favor and to your detriment?

Post-Sale Items to Watch

If you stick around in a post-sale role, whether it’s leadership, management, mentor, or if you find yourself now as a rank-and-file employee, be sure to know your rights. All those HR rules and laws you learned as an owner now, generally, work in your favor. Don’t let yourself be taken advantage of. Learn to look at things as an employee, that will be harder than it sounds.

Understand what is expected of you. Ask for very specific expectations, milestones, performance metrics. If the new company does not provide them, propose some on your own. These will obviously be based on your assumptions and understanding of the new-post merger operations. As you learn more and need to revise any of these metrics, voice your concerns or revisions immediately. Understand if they want you to bring up problems and ideas, or they want you to just shut up and color.

Check Yourself 

Way back in my time as an Army officer, I had to be reminded a couple times that my unit of men and equipment was not really mine. It was the Army’s. It felt like mine, I was on the hook for those lives and millions of dollars’ worth of equipment in every definition of “responsible.” But at the end of the day, it, and I, all belonged to the Army, and I was playing my role. 

Not unlike being an officer, I loved being a business owner. My partners and I grew and shaped the business around what we knew and the directions we wanted to pursue. Our successes outnumbered our failures. We hired and mentored fantastic staff and I enjoyed learning as much from them as I think I taught them. I probably never said or showed it enough, but each team member was crucial to our success and we did our best to reward and take care of them. I felt close to our staff and certainly responsible for them.

In many ways, it and them all felt like mine and I hope that they felt like I was theirs. I think “tribe” is the best synonym I can think for our little business…and our tribe was awesome. I liked knowing that our choices provided good jobs and lives in our communities. I got no small amount of pride from watching many of them grow into their profession with a few ultimately becoming my business partners. My super-secret business strategy has remained constant over decades: hire teachable people who are smarter than yourself. 

Post-sale, I stayed on for a couple years. Our staff became my peers and coworkers. My company was gone. Our people and operations were all assimilated into the newer, larger tribe. This was all by design. I had no real leadership or management role. It was time for others to step up to those roles. I was simply the kindly old uncle-type, and the flesh-and-blood database of decades of past projects and lessons learned.

I’m at a point in my life where that is perfectly fine. But it did take some real getting used to. I’m not sure I was ever completely comfortable. But, just like the Army, it was not my company, not anymore. And that’s exactly how this capitalist economic system of ours is supposed to work.

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This first appeared in The Havok Journal on December 17, 2024.

David is a father, husband, son, boss, writer, beekeeper, outdoorsman, occasional teacher, compulsive elk hunter, Afghanistan veteran, and living proof that anyone is trainable. He is a 1994 South Dakota School of Mines graduate. David spent 12 years in the Army and Army Reserve as an Engineer Officer before that career was cut short with Afghanistan injuries. He spent decades as a consulting civil engineer working in communities all around the American West and now oversees his firm’s engineering department. David continues to amaze both friend and foe being an engineer who can write a story.

As the Voice of the Veteran Community, The Havok Journal seeks to publish a variety of perspectives on a number of sensitive subjects. Unless specifically noted otherwise, nothing we publish is an official point of view of The Havok Journal or any part of the U.S. government.