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.
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 eventually receive from a sale. The key to reducing these loses is 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 it as well. Based on these experiences, I have developed an approach that minimizes the chances of corrosive impacts 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 mentoring 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. 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 now? 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 on 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 highly likely that you are masking your real motivations with ones that you find more logical or socially acceptable. Maybe some examples will help.
In working with one CEO, I was assured that he was selling because he wanted to spend more time with his family. As we drilled down, it because clear that the real driver for his decision the souring of the relationship with his co-founder. His partner was really rubbing him the wrong way. As it turned out, that rubbing was part of an agenda – his partner had decided to force him out by playing on his weakness – his conflict aversion.
A second CEO was looking for greener pastures. She had built a very nice business that had grown rapidly but then leveled off. When we worked through the issues, it became clear that she was not willing to reinvent herself – become the CEO her company needed in order to reach for the next level. The role of CTO was more appropriate – but she could not see her way to take the ‘demotion’. She was thinking of selling her company because she did not want to be CEO any more – coveted the role of CTO – but could not face the stigma of working for somebody else.
A third CEO was convinced that CEO stood for Chief of Everything. He was a compulsive micro-manager who could not bring himself to trust other people. This was an acceptable approach until the company grew to a size that required a more distributed authority. His initial reason for wanting to sell was an approaching birthday. In the end, he had to accept that his aversion to delegate was the underlying cause.
Please understand that I am not saying that there are no good reasons for a founder to sell a company. Certainly there are. Health – or declining health – is a good one. Advancing age is another. Yet another is the inability to become the CEO that the company needs going forward. There are good reasons for selling. My point here is that it is important to understand exactly what the underlying reasons are – to clearly recognize the true drivers – and to avoid accepting convenient masks for those reasons.
The risks of not understanding can be very high. I have seen companies fall apart after a founder had put it through the process only to turn away at the last minute. In one case, the entire management team walked out after thinking for months that they would finally be able to unlock the value in the company they had dedicated their careers to. The founder ended up forlornly re-contacting prospective buyers on his own – offering the bloody stump of his company to anyone who would pay anything for it.
Finally, recognizing the reasons is only the first step on the path. It may be true that a journey of a thousand miles begins with the first step, but there are still those other ones to manage.
© Earl R. Smith II, PhD
I provide mentoring to those who have both the courage and determination to make a truly transformational journey. My approach is heavily influenced by core principles of Zen Buddhism. I also provide advisory services to CEO and senior teams – particularly mid-market companies. I don’t offer quick fixes or follow the latest fads. If you are willing to make the long journey – if it’s time for you to come to know the person you really are and the path you should be following – if you want to start living life you were truly meant to live – then perhaps we should talk. Send me an e-mail and we can arrange a time to chat.