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Growing Talent Management Firms: Exit Strategies

Tuesday, March 17, 2015
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Many owners of small businesses wish to cash out at some point-- in order to reap the rewards, at least financially, for their hard work, long hours and multiple sacrifices. This basic business principle also holds true for talent management firms. The good news for owners is that the talent industry has been relatively hot in recent years, with plenty of buy-out activity. The question for business owners, though, is far more complicated than simply deciding whether or not to sell. They must recognize that their existing work and lifestyle will dramatically change, and not necessarily for the better. For instance, although visions of how to spend that cash are motivating, many owners may still want to contribute to the growth of the business—and the industry.

With that in mind, owners must clearly understand that they will need to let go of the personal and professional control they currently hold, not to mention the notion that they will likely have to “report” to someone else. For the most part, this last point is the most difficult adjustment factor. It changes everything.

Personally, I have gone through the sale of a few firms in this industry—either as the owner or as a partner. Some experiences were wonderful; others didn’t work out as well. Here are some key questions that business owners will need to consider as they contemplate the decision to sell their business and set sail for new waters.

Why Sell in the First Place?

The foundational question owners will need to answer is: What is really motivating me to sell? For some, personal life changes such as health issues will provide enough reason. Other owners may find that it is time to semi- or fully retire, because they seek a different pace of life or are just tired of doing the same thing every day. Other times, owners may feel they have taken the business as far as they can, and they need to turn it over to professional growth-oriented experts. There is nothing wrong with any of these reasons.

When Is the Right Time to Sell? I’m not sure there is a “right” time to sell a business, but there are logically good and bad times to sell. Clearly, when the market is active and buyers are interested is a good time to sell. There is a higher likelihood you will get a higher price for your business than during leaner times.

Another necessary condition for a “good” sale is when the business is financially strong—with both the current and projected top and bottom lines. A strong financial history will only add to this formula. There is no point in exiting your business at the lowest possible price, which will obviously be the case if your numbers aren’t very compelling.

Who Should You Seek as a Buyer? It is important to consider what kind of buyer is your firm most suited to attract. There are two basic buyer categories in most industries: strategic buyers or financial buyers.

Strategic buyers see opportunities for growth through adding new capabilities to already existing aligned businesses. An example would be the recent Wiley acquisition of Inscape to add to its training business, largely provided through Pfeiffer. A financial buyer, who is most likely to come from a private-equity background, is more interested in building a portfolio of businesses for subsequent sale. An example would be the various roll-ups by initially Provant followed by IIR and Informa. Each has its advantages and disadvantages for both sides of the deal.

The most important thing to determine is that your wants and needs (as the current owner) match the buyer’s future plans. For instance, if you want to continue working in the business, the buyer needs to be open to finding an executive position for you. Also be sure to consider what kind of non-compete agreement will be in force to keep you from working in the industry, and for how long?

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Bottom line: Having a clear personal vision will help determine which type of buyer will fit best with these needs.

What Does a Deal Look Like?

Typically, any deal will involve keeping the owner(s) around for at least a transition period--if not for longer. Indeed, firms in the talent industry are rarely sold without the key players staying on for some negotiated time. This may be a relatively short-lived stay to help with the transition. But it is more likely to be, at least as the deal is constructed, laden with earn-outs over a period of years, based on the continued performance of the business.

Of course, all of this can be negotiated. It is important to fully understand your own intentions, as well as the potential buyer’s short- and long-term plans, before beginning any negotiations. This doesn’t mean, by the way, that you can’t be fired before the end of the contract, with appropriate stipulations, regardless of any earn-out position or stock ownership. Just know that once you give up the majority shares of your business, you are at the mercy of the buying entity.

Although this sounds logical, many owners fail to understand the full consequences of the sale. Truth be told, my experience has shown more discomfort with deals down the road. As such, early exits from the business, after the sale, are more frequent than not.

How Do You Go About the Sale?

How do you let others in the industry know that you are thinking of selling your firm? This is the question that most owners want the answer to, but it is complicated because there are so many types of deals.

To get started, make it known to both private investors and industry leaders (you think are a good match) that you are potentially interested in selling your business. Of course, once you admit to this, it might be hard to negotiate a great deal since potential buyers may assume some level of eagerness—or desperateness--on your part. You can also retain a professional firm to broker your sale, their job being to seek out potential interested parties and negotiate a deal for you.

And, if you are financially healthy, a leader in your particular niche, and have a sustainable and competitive value proposition, private-equity investors will find you. For example, I know a private-equity firm with a training and education vertical that seeks companies in the compliance business. That is, they look for firms whose offerings meet required state or federal legislation, such as employment law, fair-housing, law enforcement procedures, or required certification standards for home inspectors and healthcare professionals.

Remember, however, that having a sustainable, competitive value proposition isn’t as easy as it sounds.

What Are Your Next Steps?

Just like any project, deciding to sell your business requires a well thought-out plan. Don’t go into this endeavor without having carefully deliberated all the possible parameters and dynamics involved--not the least of which is the impact it will have on you current staff.

Be sure to engage some trusted advisors who have navigated these waters before, who understand the pros and cons (and ups and downs) of exiting a business. Keep in mind the words of Robert Burns: Even with a great plan, “the best laid schemes of mice and men oft go awry, and leave us nothing but grief and pain.”

About the Author

Dr. Cohen is a 40+ year veteran of the talent management industry having founded and/or led eight different business entities in the field. He currently is in private practice focused on strategic and business planning including senior leadership development. He also has served on 19 different advisory Boards for firms in the training and education sector helping them effectively navigate their growth strategies. He can be reached at: steve@strategicleadershipcollaborative or 952-942-7291 and his website is: www.strategicleadershipcollaborative.com.

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