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TPL Insights: Building Peak-Performance Cultures #142 – Think Long and Hard about Selling Your Business, to Whom, and What Happens After

October 27, 2022

By  

Rob Andrews

For decades now, I’ve studied mega-successful organizations and the founding CEOs who built them. Many of my good friends built great organizations and cashed out. A few are happy with the results. Most are not. If you google “selling your business” or “what to do after selling your business” or anything along these lines, you’ll find mountains of advice on how to maximize your financial returns and shockingly little about how to ensure the ongoing success of “your baby,” and what to do with yourself after you’ve navigated an exit. I’m not suggesting what you’re about to read is the last word on wisdom, but surely some things you might consider:

Imagine Life Post Transaction

If you’re like many founding CEOs, much of your identity is tied up in your business. It’s also the source of your satisfaction, sense of purpose, and reason to keep going. I went to see a good friend of mine a few years ago who had sold his business at a huge profit. Doug was 72, in excellent health, and living in a very nice 12,000-square-foot house in one of the nicest parts of Houston. It had been a couple of years since I’d seen Doug and I was excited to reconnect and catch up. We’d known each other for 40+ years (I bought one of my many muscle cars from his dealership in 1977) and had spent countless hours together cussing and discussing politics, family, sports, and most often best practices in building great enterprises.

When I asked Doug how he had been doing, his response surprised and deeply saddened me. He said, “Rob, I’m just not having any fun anymore.” After a long pause, he said, “The last time I remember really having fun and being fulfilled was when it was still a struggle.” We talked for another hour or so and he lamented that the long-awaited and highly anticipated “event” that would set him free, set him up for life, and allow him to travel, play golf and support his charitable interests had been a huge let down.

Not only had the transaction been anticlimactic (he already had plenty of money), but to add insult to injury, the business he’d worked so hard to build over 40+ years didn’t make it two years under new ownership. Dozens of employees who had been loyal to him for decades, who had had a great place to work that they truly loved, were out. Doug felt like he’d betrayed his employees. Sure, he had done well in the transaction, but the folks who stood shoulder to shoulder with him for many years had not. Doug is not alone. Many successful entrepreneurs who cash in face depression and a sense of hopelessness they never anticipated.

Start with the End in Mind

I’m not suggesting that selling your business is a bad idea in and of itself. I am suggesting that your exit if in fact there is to be one, should be planned carefully. According to Harvard Business Review, between 70% and 90% of acquisitions fail. A shocking number for sure, and the common denominator is people. Mergers and acquisitions often fail because key people (including the founder) leave, teams don’t get along, the new owner has no idea what they’ve bought, the session plan stinks or is nonexistent, the integration plan is inadequate or poorly executed, and the key principals are nowhere close to being aligned.

Hire a Coach

The sale of a founder-led enterprise typically involves investment bankers, private equity principals, business lawyers, accountants, estate planners, and more. Many of my good friends and colleagues fall into these categories, facilitate mergers and acquisitions for a living, and, for the most part, are good folks. The challenge as I see it is that none of these professionals fully understand “the secret sauce” of your enterprise.  Investment bankers by and large present potential buyers with a myriad of financial metrics, charts, graphs, analytics, and projections.

What’s missing in most cases is, as Paul Harvey says, the rest of the story. Hiring an impartial consultant or coach who has “no dog in the fight”, is one way to put a key person on your team to help you make sure you’re making decisions that you’ll be happy with well past the transaction date.  Your coach could serve on your advisory board and play dual roles. At a minimum, they should possess a full understanding of your purpose, mission, vision, values, and strategy. They should also know the other key players, top leaders within your company, and the key principals on the sell side team.

In this mix of professionals, a properly positioned coach is the best position to advise you, as they are not biased for or against a transaction. All the other professionals in the mix make their money from their part in the transaction itself. Your coach, much like your internist, is paid to protect your overall wellbeing. Period.

Alignment with Different Types of Buyers

Financial Partners: This is the most desirable suitor if you want to see your businesses survive and thrive. The best way to ensure your business doesn’t implode under new ownership is to do your best to make sure your suitor is aligned with your purpose, mission, vision, and values. Whether you call it purpose or not, your company exists for reasons well beyond making money. I know this because if it didn’t, you’d likely be out of business by now. Making sure you’re selling to a buyer that aligns with your purpose is one important way to stack the deck in your favor. True financial partners are rare, but they are out there.

Does your suitor understand your enterprise and are they committed to its continued growth? How will your suitor measure the health and sustainability of your company, and does it align with your company’s values? What will your suitor do to engage and retain your best talent? Are they willing to commit to demonstrated career paths, training & development, autonomy, compensation, benefits, and culture-building activities?

Strategic Buyers: Those who would acquire you to buy its way into an adjacent market to complement its own. Examples include Amazon’s acquisition of Whole Foods to accelerate its growth into the grocery sector and Microsoft’s acquisition of LinkedIn to bring its business-focused social network, technology, and immense data with the intention of eventually integrating it into the Office Suite of products.

Does your suitor have an effective strategy for absorbing your business while not diminishing your brand? Will your suitor’s customer relationship capabilities better position your enterprise to continue its momentum? There are great strategic operators like Quanta Services, Disney, and Waste Connections. Avoid the likes of Men’s Wearhouse who acquired Jos. A. Bank and drove it right into the side of a mountain. Avoid buyers like Safeway who ruined Randall’s, Dominic’s, and Genuardi’s.

Scale and Consolidation Buyers: These buyers are essentially the opposite of strategic buyers. They are about scaling up and leveraging their existing infrastructure to reduce costs and create value through enhanced efficiencies. Part of your existing business must “go away” for your buyer’s strategy to work. Examples include the Exxon Mobil merger and countless acquisitions by Alimentation Couche-Tard.

Do your suitors articulate ways in which they intend to realize cost-saving synergies while preserving unaffected areas of your company? If they intend to replace your technology, human resources, engineering, and procurement functions with shared services, how will the elimination of those functions and the people who manage them affect the rest of your company? Is your suitor’s culture compatible with yours?

Tuck-in and Bolt-on Buyers: Tuck-in buyers are larger organizations that typically intend to absorb your business entirely to acquire a specific book of business, technology, or expertise. In this scenario, the smaller company rarely maintains any of its original systems or infrastructure after the acquisition is completed. Tuck-in buyers will cash you out but not preserve any of your ethos. Bolt-on buyers are similar but may allow you to maintain some independence.

The Best Solution: Obviously, a financial partner is your best option if “your baby” thriving past the transaction is important to you. Many successful founders/CEOs wind up selling to private equity firms. If you choose this route, conduct serious due diligence on the firm and its principals. There are some outstanding PE firms out there that you would be very happy with. There is also plenty of other variety and you want to avoid those.

There are other solutions, like recapitalization, which allow you to take chips off the table and retain control. These are beyond the scope of this paper and will be discussed in future blog posts. We would love to help you with preparing your business for succession, whatever form it will take. Give us a call.

Warmest Regards,

Rob

Rob Andrews
Allen Austin
Consultants in Retained Search & Leadership Advisory

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