Five Things You Wish You Knew Before Selling Your Firm
If you’re considering selling your firm, this article is for you.
1. Promises Made: If a “commitment” by your buyer ain’t written down in the purchase and sale agreement at the time the transaction closes, then it’s essentially just vapor. Why? Things change after the transaction. Big things. Many times, the strategic and cultural reasons that led you to choose a particular buyer change. Examples? The buyer commits that your firm will be part of its transportation business line post-transaction. You’re fired up. You’ve met the leader of said business line—let’s call her “Shirley”—and you like her. She’s got vision. Great communicator. She’s an operator, can build a business. Oh yeah, this sale is exciting and is going to be great for your people and clients. Deal closes. Then 30 days later, Shirley announces that she’s leaving to join the firm’s #1 competitor for a truckload of money. Her replacement is a dud—a huge step backwards. Surely Shirley wouldn’t do this to you! What about your people?! Your clients?! Yup, it happens. OR consider this. You sell your firm that specializes in high-end residential development to one that works for national multi-family home builders. (They bought you to diversify their portfolio. Smart people. You’re impressed.) Sixty days post-transaction their biggest client goes bankrupt, and they need to slash expenses across their business—and that includes your staff and operations. Ouch. Sounds implausible? I suggest you talk with anyone who sold their design or environmental firm in the fall of 2008 to verify just how real this can be. The bottom line is that things can and do change post-transaction. And most of the time you’re not able to control them. That’s why it’s important to understand point 5 below.
2. Regrets, I’ve Had a Few: Like Alice falling down the rabbit hole. Or Lucy discovering the secret garden through the wardrobe. Or Dorothy transforming from sepia to Technicolor. After you sell the firm—everything changes. For you. Especially if you’re the founder and CEO. To the pantheon of big life changes/transitions (marriage, birth of kids, changing jobs, founding your firm, kids going to college, divorce, etc.) you need to add “selling my firm.” The day before you sell, you’re in charge, you’re accountable to yourself alone. The day after, you’re not, instead you “report” to someone. The day before, your entrepreneurial spirit and ethos drive the culture of your firm. The day after, you need to follow rules and regulations that are—let’s face it—foreign to your nature. The day before, if you have an idea—regardless of how half-baked it is—you can galvanize your team to explore it, damn the torpedoes. The day after, you need to get the “OK” from managers (Exec VPs, Senior VPs, Regional Directors, COOs) who are “competing for limited resources” or who “have to get my boss to sign off on that” or need to “bring that to the strategy and growth and development committee” or “put that on the agenda for the next quarterly review and investment off-site.” The day before, you see a business development opportunity—whether it’s in Kalamazoo or Kathmandu—and you mobilize to pursue it. The day after, you need to “run that by the big guy.” For super high-functioning or (as we say in Boston) “wicked smaaht” founders who sell their firms, the days and months afterwards can be challenging psychologically. Many have regrets but are unable or unwilling to share them. Make sure you have someone you can talk to post-transaction. Don’t bottle it up—it’s not good for you or anyone around you. And realize, you may have regrets. That’s why it’s important to read point 5 below.
3. Sixty Days You’ll Want to Forget: Depending on whom you sell to, their due diligence of your firm’s finances and operations will take between 30 and 90 days. Let’s call it 60. This is the time between when you sign the Letter of Intent (LOI) to sell your firm and the purchase and sale agreement to finalize the transaction. Think you’re busy now? Well, you’re sadly misguided. Because during due diligence, you will take on THREE new full-time jobs (in addition to your current responsibilities) as follows: (1) Manager of Due Diligence—regardless of your delegation skills, you’re the one responsible for making the representations and warranties; (2) Subject of Due Diligence—sure, they are examining your firm, but they are equally interested in you—your quality, your commitment, your strengths, and your flaws; and (3) Chief Negotiator. This last one should not be underestimated as there are numerous deal points to be negotiated between the LOI and purchase and sale. And 99.9% of those need to be negotiated—with you on point. Also, depending on (a) who your buyer is (some are well known for pulling this move) and (b) your firm’s actual performance—you may encounter a “retrade” of the transaction by the acquirer. A “retrade” is when the buyer changes the price (always down, never up) or the terms (always worse, never better) depending on what they find in due diligence. It’s stomach-churning and one more reason why during the sale of your firm, you’ll experience 60 days that you’ll want to forget. This is one reason why so many sellers go on vacation within the first month after selling their firm. (More on deal retrades in an upcoming Word on the Street article this year.)
4. Ordinary People: To quote Rick Blaine, “Ilsa, I’m no good at being noble, but it doesn’t take much to see that the problems of three little people don’t amount to a hill of beans in this crazy world. Someday you’ll understand that.” Be prepared for lots of changes in the relationships that you have with your team and that they have with each other. There’s a goodly amount of drama before a transaction closes when a leadership team finally understands that the firm is inexorably on the conveyor belt to a sale. There will be jockeying for position—with both you and the buyer. There will be threats—to leave or to “vote against the deal.” There will be bargaining—for money, status, or protection. This can be all-consuming. But at the end of the day, it doesn’t amount to a hill of beans. In 99% of the cases, the personalities and people on the leadership team overestimate their individual importance relative to that of the firm’s brand.
5. It’s (Not) Not All About the Money: Strategic fit, cultural fit. Sure, they’re super-important. Indeed, they are the #1 and #2 factors that are foundational to your buyer’s decision-making. Your acquirer’s goals are driven by a strategic plan (if you’re selling to a strategic buyer) or an investment thesis (if your buyer/investor happens to be one of the 100+ financial platforms—see last week’s article, Of PE Platforms and Playlists—in our industry). Your goal however is to…what exactly? Sell, yeah, sure—but why? To facilitate a transition? Maybe. To “take care of my employees?” O.K. To provide continuity so your clients are taken care of? Sure, let’s call it that. To “de-risk” (six letters dripping of euphemistic business-speak) yourself in your 60s? Possibly. To find a way to sail off into the sunset and enjoy life without ever filling out a timesheet again? Probably, there is some truth to this. In 30 years of helping owners sell their firms, I’ve heard all of these “why” statements and more. They all hold some elements of the truth—just as they all mask the truth itself. Often, a seller will make these declarations out loud because they are embarrassed (or in some cases afraid) to state why they are really selling their firm. That is to move value into their bank account—be that in Zurich, Kansas, or Zurich, Switzerland. Your goal in selling is to maximize the price for the investment you’ve made over the years to build your firm. All these other decision-making factors are important for sure. But they are just variables in the linear equation of maximizing the financial terms that allow you to transition and ultimately walk away to the next phase of your life. Related: Check out Mark Goodale’s interview with Brendon Cussio, Getting the Best Deal as a Seller, from June.
For more movie quotes or references, you can contact Mick Morrissey at [email protected] or 508.380.1868.