Mergers & Acquisitions: Thinking About Selling – Part I: Confronting the Reasons

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Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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Most M&A transactions fail to close for reasons that do not relate to the structure, timing or fairness of the deal. In fact, the emotional state of the principal seller is a far more potent factor than any thing that the lawyers or accountant might focus on. Increasing the chances of an actual closing involves helping the seller come to terms with the implications of the decision to sell.

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One of the most difficult decisions that a founder faces is when and to whom to sell his interest in a business – a business that he might have spent a considerable part of his adult life building. It is a decision that is often made and unmade many times along the way. Frequently and after much work and discussion, a founder will end up deciding not to sell. The result is lost time, resources and reputation.

This process can have corrosive effects on both the organization and the value that the founder might receive from a sale. The key to reducing these loses is in organizing a process that supports a more orderly and reliable effort. It also means considering a range of alternatives short of selling the company. I have gone through the process with my own companies and led a number of founders through the process. Based on these experiences, I have developed an approach that minimizes the chances of corrosive effects and more completely fills the needs of the founder. Here is the first step of that process:

Confronting the Reasons: A friend engaged me to help him work through the issues of selling his business. He had spent the better part of two decades building it up and had begun to feel ‘burnt out’. Our weekly sessions had become dominated by his feeling that he needed to make a change. Initially I focused our discussions on the psychological motivations that were driving his decisions. I made it clear that I thought it was important that he identify and confront the ‘real reasons’ that he was considering selling out. A couple of weeks into the engagement we were again discussing his reasons for stepping onto a path that would essentially retire him from the business. He looked over and said, “Working with you on this is more like sessions with a therapist than an investment banker”. In an important way he was right. My first milestone is to help him understand clearly and in great detail why he is thinking about selling.

The reasons that somebody initially gives for selling a company are almost always not the true drivers of the process. Many of them are convenient masks for deeper reasons. Here are a few that are particularly suspect: I want to …

• Play more golf. (Alternatively – fishing, travel, work in my shop, drive my tractor, etc.)
• Shift gears – slow down
• Spend some time writing
• Try something different – maybe start another company

Now any of these may be good reasons for deciding to sell – but every one of them can also be a mask of an inadequate thinking through – a failure to confront the real and underlying reasons. For instance …

• OK – play golf – but don’t you play with your business friends and don’t you spend a lot of time sharing experiences? If business is a big part of the time you spend golfing, how is it going to change when you are no longer in the game?
• OK – shifting gears – but are you really ready for shuffle board full time? How sure are you that your condition is permanent and not just a temporary reaction to a hard year or two? Have you thought about which gear you want to shift into and how long you might stay there?
• OK – writing – how much time do you spend writing? As someone who does a lot of writing, I can tell you that the silence of having less to do is not going to motivate you to write. If you are not writing now, what makes you think you are going to become a writer after you retire? (BTW, the use of the word ‘retire’ in these situations can generate some interesting responses.)
• OK – something different – but why do you have to sell your company? Can’t you bring in additional management that will give you time to poke around a bit? I’ve noticed that you haven’t done much poking around to date.

An old friend was fond of saying ‘I’ve never met anyone who could tell it straight – including me.’ His point was that no matter how earnestly you assure yourself that you are telling yourself the truth, it is very highly likely that you are masking your real motivations with ones that you find more logical or socially acceptable. Maybe some examples will help.

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