The 80/20 Rule on Preparing for an Exit for a Professional Services Firm: A Founder’s View

Exiting a professional services firm will be a founder’s most consequential event. It will be the peak of their entrepreneurial journey. As a founder, I recently sold my firm to a growth-oriented private equity firm. Our sale process took 10 weeks, from the Letter of Intent to closing day. My M&A advisors have told me that our process was among the smoothest and most efficient they have ever seen. One key reason for this is the preparation completed before the process.  There is a lot to prepare with limited time, so it is important for you to focus on the biggest bang for your buck.  The 80/20 rule, also known as the Pareto Principle, states that 80% of outcomes come from 20% of causes for any given event. For your exit event, focus on the 20% of prep that yields 80% of the success.  Here is what I focused on:

• Advisory Team – build relationships with M&A advisors well before your exit. I met mine through Collective 54, years before my exit. This built trusted relationships before the process.  Partner with M&A specialists, not generalists. They should have a proven track record in your niche. They should have a good reputation, a reputation to uphold. My advisory team included an exit advisor, an investment banker, legal counsel, and accountants. Your advisory team is like a basketball team that is playing to win. In USA Olympic Basketball, the 1992 Dream Team is often called the greatest team ever. It won the gold medal many times.  What many say made this team the Dream Team is its exceptional chemistry – both on and off the court.  Many of the players were already teammates or had played alongside each other. My advisory team had exceptional chemistry, like the 1992 Dream Team. They knew, trusted, and liked each other, having done many deals like mine together. It makes your transaction personal, not just business.  Have the Dream Team in your corner, and you will bring home the gold medal.
• Financials – get your financial house in order. I recommend a sell-side Quality of Earnings (QOE).  Why?  Buyers will do a buy-side QOE. Buy-side due diligence starts with financial due diligence for a reason. Deal breakers can arise that kill the deal. A sell-side QOE will help you get your finances in order. It will prepare you for the buy-side QOE. A sell-side QOE also lowers the chance of the buyer re-trading after the LOI stage.
• Virtual Data Room (VDR) – one of the top deal killers is missing your forecasts during your sale process.  Buyers lose confidence in your business.  Buyers have a good reason to re-trade or walk away. You need to keep your eye on the ball and ensure continued business execution.  How is this related to the VDR? The buy-side due diligence team will raise many requests and questions. This is a huge distraction, without a doubt. One way to reduce distraction is to get ahead of the curve. Prepare the VDR months before your process. This cuts the time needed during the transaction and speeds up deal closure. I received a due diligence checklist from my M&A advisor a year before the process. We focused on using it to populate a VDR. When the buy-side due diligence began, we had most of their requests. This helped us close the deal.

The above focus areas are not exhaustive. They are a guide to help you be intentional about your focus. Many factors affect a successful exit, including luck, timing, and the market. Some are controllable, while others are noncontrollable. What you can control is your preparation.  Alexander Graham Bell has said, “preparation is the key to success.” Focus on my top three prep areas. They will maximize your chances of a successful exit.