Anyone Sold a Design Firm Before?

[shamarkaleo]

Hi Web Gurus,

I'd like to chat with anyone here who has successfully sold a web design firm in the past.

We have a design firm with five staff and 50+ clients, and we're planning to sell.

We've sent inquiries out to several design firms that we think would be a good match for our client's needs, and two have expressed interest.

But what are the legalities, here? What are the issues we need to consider with a sale/merger?

How do you price the sale of a company like this? How do you handle the transition of power? Are non-competes required when you sell your company to another company? (Meaning, you cannot design in the same niche for the next ----- years?)

Are you required to include company equipment in the sale (computers, etc.), or just the client list?

How do you ensure a positive transition for everyone involved?

I'd love to hear your thoughts,

Kelli

[gembiz]

Have you consulted a business broker? There are firms that specialise in the sale and purchase of companies, usually for a percentage of the sale price.

Good luck in any case.

Brian

[johngroup]

Lead off with your CPA and attorney.

[SnerdeyWebs]

Simple.. get legal advise :)

This is not a place for that but I'm sure you will get some replies to this. So why not give mine too ;)

Everything is up to you, it's your company and they have to comply to your terms. If you don't want a non-compete that's up to you and if you do set your terms. Just don't make it impossible to follow or match the sale / services.

When you sell you're selling all of your hard work, hours, weeks and having a 5 staff members and approx 50 accounts all that has to come into play.

Staff members need to be protected or the new company will come in and take whatever actions they see fit for the new investment. If partnering then your not selling anything but your services and normally at a reduced rate / trade / merge etc.. all of which is very legal details. Contracts for each staff member can be shown to buyers to agree too as well.

Want out? Sell it lock stock and barrel and warn your staff of the sale before you do but then again it's your business so even this part is important as some might quit now. Just name your price and be prepared to back it up with statistics, forecast and charts etc..

Partnering? Oh, think about it. You have 5 people working for you and 50 clients or so. You're doing something right seams to me. But, with only 50 clients you might be cutting it close and too hard to balance everything? So don't be over the top and don't cut yourself short in providing your services too low either. Find a happy medium.

Then when you have it all figured out go see a lawyer to go over the scope of your venture. Your 1st meeting should be soon as you have an idea of what your after and what you have in mind to do. They will steer you in a protective direction :) At least that's what your paying them to do.

If you'd like to visit more just PM us :)
Snerdey

[rickvidallon]

Have you consulted a business broker? There are firms that specialise in the sale and purchase of companies, usually for a percentage of the sale price.

Good luck in any case.

Brian


AGREED!
A business broker is the way to go. CPA and attorneys cannot value a business, but a lawyer will help to seal the deal.

Here is a site for a business broker who really knows his stuff and his site has posted of good advice and information.
Business Valuations and SBA Opinions Hampton Roads (http://www.hrbiz4sale.com/ValuationsTypes.aspx)

[Orion]

No different than any other business... You either go the attourney route or just hand over your business for X $ and walk away (how a lot of small businesses work but you won't get much $ for it that way)...

[OroLatina]

There are a number of possibilities. The answer to your questions all reside in how you structure the purchase agreement. You need a small team to pull this off with minimum aggravatation. I suggest a Tax Attorney (who should either also be a CPA or partnered with one), a Corporate Attorney and possibly a Business Broker (if you are not averse to commissions).

Normally there are non-competes because the last thing anyone wants is to purchase a company only to have the former owners take on clients that were otherwise "sold" to them. The standard term is usually 2 years (except for IT firms/employees...a judge ruled some years ago that 2 years in "Internet Time" was ludicrous and 6 months is the precedent for IT workers due to the rapid changes in the information technology landscape). There is also almost always a transition period where old management works with new management in a consulting capacity, up to 1 year in large organizations.

Valuations are are usually based on a number of metrics including year over year sales growth rates, return on equity (ROE), return on investment (ROI), and total revenue. These numbers help achieve a fair value and depending on the afore mentioned figures, they help justify a multiple or premium. Even in today's dismal economic climate, businesses that can achieve high growth rates and ROE/ROI numbers greater than 20% can justify as much as a 10 multiple. For example, 1 million in revenue with solid growth numbers and strong prospects for continued accelerated earnings growth could justify as high as a 10 (or more) multiple and that would yeild a 10,000,000 purchase price for the company. Naturally this is dependent on the type of business and the industry that business is in and the product that business is selling. If you are in a highly competitive business (as opposed to the example above which would suggest a more niche business), you might only be able to justify a selling price of either last years total revenue or the forecasted revenue for the next year. Again, there are a large number of variables. I would recommend getting the advice of a business broker. They have access to the market research and can give you a much clearer view of your industry's landscape. They might also be able to help you window dress your business to fetch the highest possible selling price in advance of an actual sale.


We at OroLatina wish you the best of luck in your sale!

Christopher Lazaro MBA
OroLatina

[gbgusa]

All good advices. I am a business broker and sell businesses like your's for living. I wouldn't suggest to go with lawyer or accountant unless they specialize in selling businesses. Business broker is your best bet. We can help you if you'd like; just PM me and we can discuss details.

Good luck!

[freq]

For a small firm i'd stay away from a business broker. Sure they have a template and they could crank your financials through and help put together a package, but you or your buyer are giving up a slice of the pie for no reason. You'd be better served reading a good book on negotiation :)

I bought out a business partner some years ago. different industry, but I consulted a good corporate attorney. He helped me put together a nice buyout and saved me a ton of money. You obviously want yours to go the other direction, but same principle applies.

Is your buyer interested in anything more than your client list? Are they print and marketing focused and want to boost their web game? Is your team more valuable to them than your client list? How bad do they want what you have? Would they consider you retaining a % of ownership to assure that the transition happens smoothly and business grows, or do you just want to take the money and run?

How many years have you been in business? What's your EBIDA? What does your 5 year business plan look like? These are all questions that your buyer will want to know, and a competent accountant or corporate lawyer will be able to help you make look good as possible.

[srblogger]

Hire a broker to do the work for you. Most charge around 6-10%.

[villageloop]

A broker is probably your safest bet.

The main thing to understand is that as a traditional design firm, you probably dont have much in the way of business assets (I assume).

Your real value to a buyer is your brand and your clients.
Yes your people are valuable also, but that generally is not taken into account because of too many unknown variables. Staff may leave, they may not work as well for the new boss, the new company may have thier own, they may work more hours, etc...

Just remember where the value is for a buyer.
Its your baby and you may see things differently. Its been your blood, sweat and tears making it happen. But that doesnt matter at this point.
An entity looking to purchase a service business is looking for name recognition, branding, and clients.

[Webconomist]

A business broker is an option, but as others have said, they follow a formula and may not understand the business and model. I've built and sold two ".com" companies, one of them a service company.

You're selling a services based business, so you are selling current clients that may buy additional services now or later, plus you are selling reputation and brand equity.

As one person said before it's about establishing value - the Valuation.

The "value" comes from the "goodwill" that is, customers you have, prospects in the pipeline and potential within your market.

In an economy like this, selling a service business is hard, but not impossible in finding the right buyer.

The buyer may request you stay on for a "transition period" if you have very good relationships with clients. This can be anywhere from 6 months to two years and should come with a salary. There will likely be layoffs and they are related to trimming jobs that are the same. It's also a chance to get rid of "poor performers" for both buyer and seller who will site "efficiencies" as the underlying reason.

Culture: This is a big factor in a buy-out. When it happens it will take 12-24 months to "assimilate" the culture of the buyer and bought and is perhaps the hardest part and least recognized, part of an acquisition.

In setting a valuation, be sure to count your Web presence; inbound links, page rank, search ranking etc, as this has intrinsic value. If you have a PR of 5+ that is good and means a lot in terms of being "found" in your space.

PM me if you have further questions.

[RichAtVNS]

Hi Web Gurus,

I'd like to chat with anyone here who has successfully sold a web design firm in the past.

We have a design firm with five staff and 50+ clients, and we're planning to sell.

We've sent inquiries out to several design firms that we think would be a good match for our client's needs, and two have expressed interest.

But what are the legalities, here? What are the issues we need to consider with a sale/merger?

How do you price the sale of a company like this? How do you handle the transition of power? Are non-competes required when you sell your company to another company? (Meaning, you cannot design in the same niche for the next ----- years?)

Are you required to include company equipment in the sale (computers, etc.), or just the client list?

How do you ensure a positive transition for everyone involved?

I'd love to hear your thoughts,

Kelli

All of that is negotiable.... LOL

But If your actually selling an incoporated company lock stock and barrel.

It is not just the client lists,
1) it is the rights to the contracts, the trademarks, copyrights, patents and work product.
2) your non-compete is required for a period time. (and definately no contact with your existing client base except through the new ownership will be allowed)
3) usually you need to serve in the new firm for a period of time to service the clients
and help the buying firm figure out you operations.
4) All equipment.
5) Your losses/tax debt (WHICH THEY WILL USE TO REDUCE OR INCREASE THERE OWN TAX BURDEN)

THOSE ARE THE MAIN THINGS

BUT NOTE THEY ARE ALL NEGOTIABLE!!!!

Look you run a business already.. Brokers, Lawyers and CPAs who you have not dealt with before are just in it for a slice.

If you have an existing Lawyer and CPA they should be able to get the financial details for you and read the legalease on any contract you want to sign.

Just hammer out your details with your perspective buyers (no lawyers in the room), After you have the list of points, have thme right up the contract
and then do not sign anything till you go over the contract specifics with your lawyer and CPA.

MOST IMPORTANT!!!!!!!!!!! Do not tell your employees you are selling till you know it is a signed deal...
If the deal does not go through (and that means untill it is signed and noterized) you do not want to lose employees, or clients to get wind of a change.
It could devastate your business if employees or clients are unhappy or look to leave!!!!!!!!!!!!

Finally understand that it may never be a positive transition for everyone. But it has to be for you since you will be out of the business!

[mammaw]

Hi,

I have no experience selling a design firm, but I can tell you because I made the mistake myself--NEVER BUY OR SELL A COMPANY WITHOUT CONSULTING AN ATTORNEY!

I bought what appeared to be a thriving company from a person I had considered a good friend for 30 years. Got taken to the proverbial cleaners! Turned out some of the "accounts" were bogus, others had canceled their orders due to quality issues, and the books were phony as a three dollar bill. Even some of the equipment I purchased believing it to be bought and paid for still had payment due! We took out a second mortgage on our home, and got an additional bank loan just to buy the company, and lended up losing our home and our excellent credit rating because I tried to save money by handling the sale without an attorney.

Take my advice, if you're selling your business, get an attorney and have him draw up the agreement or if the seller offers one, to go over it with a fine tooth comb for you before you sign on the dotted line. It's worth the cost.

Best of luck,

Kathy

[eagent]

Excellent "problem" to have right now.

I have founded or co-founded a number of companies, 2 of them design firms, 4 of them web-development firms (that sound a lot like yours).

Some sold for good money. One deal (I was VP Marketing) received a $28.5 million acquisition price... and ended up broke after 1 year. The founders walked away owing taxes on the purchase price, but no cash to pay the bill.

One associate sold to Palm Computing for either $40 million in stock, or $45 million cash. On Thanksgiving day. He took cash. Smart, smart move. He now owns a beautiful riverside home and a pretty yacht... and a new, thriving Web 2.0 firm to play with. And investors chase him, rather than vice-versa.

Here's the upside: you can get a decent multiple on revenue if you have some brand and IP assets (eg a recognizable brand in your market; some software or processes that make development and optimization of sites and web content better than another).

Before pulling the trigger on a sale, here are some quick things to think about:

1) Why are you considering selling? Bored or Burned-out? Competitive threat? No fun anymore? Want to go do something else?

Know the answer to this before you do anything. Sometimes you can hand the keys to a trusted, talented associate, employee or pay-for-hire CEO (be wary, but it's doable). Sometimes that break can be all you need to keep the firm thriving.

And sometimes the buyer will simply become an investor in your firm, giving your the extra resources to have a "mini-liquidity event" and to fuel bigger growth... the things you would do if you had the extra cash.

2) Think about how you want to exit your firm:
Cash?
Cash+Equity (so you can play in the upside)?
Stock-swap (this is HIGHLY volatile. The $28.5 million deal above was that kind of deal. Ask me if you need more info)?

3) Think about what you want to do next:
Play?
Work Different?
Retire?

Each has pros and cons to consider. I have sold half of the companies I've founded. 2 are still running today with plenty of cashflow and profits. I would have done better to replace myself and held onto the firms than to sell.

4) Think about how long you can stand to work for the acquiring company.

I've found that most of the time, they want you for 12-36 months.

And most of the time, you'll be climbing the walls at 4-8 months. SO think carefully about how you structure your personal exit as well.

5) A Business Attorney is a must. I've taken the cheap route twice. Not a smart way to go. Go with a professional attorney who is referenced from a friend in the business. You'll make 20% to 300% more, and you can fix costs with a good attorney and both win (example: a girlfriend was offered $25k and a job to sell her handbag business in 2000. She grabbed the best attorney in her field, and ended up with $3.2 million and a contract that paid $17k per month as a "design contractor".

6) Be very present with the process. It's important to understand what your goal is, what your buyer's goals are, and how they mesh. Bad deals happen because of either bad people, or a bad mix of businesses. Keep that in mind and you'll do much better. If you'd like, I have a document that describes each of the key factors when combining businesses (in a very 30,000 foot view, but covering the 7-key issues).

I hope that helps. This can be an excellent opportunity to cash-out and follow your passions.

Or an opportunity to entrench and find new passion within your business and life, and grow to the next level.

Either way, enjoy, and my very best to you. If you want to talk about it for a bit, I am open for an email and phone call.

To your success,
ME