Let me begin with the disclaimer that there are many different types of exit strategies and many different reasons for exit. That being said, in the text that follows we will only focus on the entrepreneur who sells the business and stays on in an executive capacity for the new entity. Most entrepreneurs are taught to begin identifying their exit planning strategy as early into the lifecycle of a venture as possible. In fact many entrepreneurs are so predisposed to selling their company for the proverbial pot of gold at the end of the rainbow that they spend more time positioning for sale than operating their business. But my question to you is this: Is selling your business all that it’s really cracked-up to be? In today’s post I’ll discuss the flip-side of the coin by pointing-out what most entrepreneurs usually fail to consider; the downside of selling a business…
In my experience I’ve found that there tends to be four types of entrepreneurs: 1) The Cowboy: those that jump into a business venture as a type of “get rich quick” scheme looking to position their business for sale at the earliest possible opportunity. The Cowboy entrepreneur has no interest in being part of any long-term endeavor; 2) The Builder: entrepreneurs who while still predisposed to exit via sale take a bit more time and effort in their endeavors by using a more strategic and calculated approach in their exit planning. The Builder entrepreneur grows the enterprise according to a plan for the purposes of maximizing valuation within a given time frame and will only sell under very specific and favorable circumstances; 3) The Opportunist: Those entrepreneurs who never really intend to sell the business but get approached by a private equity firm, investment banker or principal buyer and decide to “get while the getting’s good” and; 4) The Operator: Those entrepreneurs who view themselves as one with the business and would never sell under any circumstances.
Let’s face it; selling a business feels good – the press, the public accolades, the sense of personal and professional achievement, and last but certainly not least, the rather large and sudden balance increase in your bank account are all good things. What’s not to like? The reality is that in the courtship leading up to the sale, and in the honeymoon immediately following the sale, there is much to like and not too many unplanned or unanticipated headaches to deal with. But as time marches on and the business of business starts to take over, the facades begin to fade and the ugliness of what really has happened begins to set in. The truth of the matter is that until you’ve gone through this process a few times you don’t really know what you don’t know. You certainly understand the price you’ve been paid to induce you to sell the business, but it is not until long after the deal is done that you begin to understand the very true and real cost of acquisition. You may be interested in reading a prior post entitled “Managing Disposition Risk.”
The best dispositions are the ones in which you cash out and walk away – a clean break is always best for a wide variety of reasons. However this is not the case with most business sales as the key principals will normally stay on in some capacity. The seller sees becoming a key-employee of the new entity as a benefit to the transaction that will add significant value moving forward. The buyer sees keeping the seller on board as a necessary evil of closing the deal and rolling up a new business. The buyer needs you to stay engaged to help sell your key employees and keep people together during the transition until the buy-side has time to make necessary assessments and changes without disrupting the continuity of operations. It really is just part of the way the game is played. Very rarely do you see sell-side principals make it for the long haul as part of the new entity.
The buy-side pitch of autonomous operations and independent decisioning quickly becomes a forgotten promise that is pushed aside for the benefit of the greater whole. If the seller doesn’t acquiesce to the whims of the new owners they become labeled as “not a team player.” It’s not that the buyer doesn’t value the seller’s intellect or ability, but the goal of the buyer is to transition every part of the new business into the overall culture of the acquiring entity as seamlessly and efficiently as possible to take advantage of the leverage and economies of scale priced into the acquisition. This all happens much easier by placing the seller into a position of while having a decent title and paycheck, really has little final say or authority….this is the first step in phasing the sell-side principals out altogether.
Ask anyone familiar with the M&A world and they’ll tell you that making the deal is the easy part, but it is the post acquisition integration of culture and personality that causes most deals to fall short of the pre-transaction projections. Most companies that are seasoned at the acquisitions game are skilled at business process engineering and systems integration, and manage the non-human aspects of transactions fairly efficiently. However few companies are as relationship centric as they would like to be, and it’s easier to systematically consolidate and eliminate positions than to absorb them.
I’m not saying all buyers and investors are evil, but you need to keep in mind that at the end of the day they typically have their best interests at heart and not yours. While there are clearly good reasons to sell, and also transactions that have motivational, value and pricing alignment between the buy-side and the sell-side, the really good deals where both sides win are few and far between. My advice is certainly not to avoid all sales, but rather go into things with your eyes wide open knowing the realities associated with your decisioning. It is always better to do a deal from a completely informed perspective rather than being blinded by the ignorance of unrealistic expectations and assumptions.