There are seven key variables sellers typically consider when making a decision to sell a business.
As mentioned previously, some owner managers have very strong feelings and opinions regarding their business’ legacy. An owner-manager may be concerned with standing in the marketplace and/or what employees, customers, suppliers, and partners think about the business relating to its morals, its attitude, the way everyone is treated and how the business is managed. Sellers who have owned their businesses for many years typically care deeply about this and often, legacy is much more important than money to these particular sellers.
The biggest fear this type of seller has is that a large trade competitor will buy the business and destroy its legacy because large trade competitors only care about their standing and position in the marketplace. Positioning yourself as an individual or small company buyer who can and will retain this is appealing to an owner-manager who has fears related to business legacy. I am looking at a bolt on opportunity to one of my businesses that is almost 200 years old and has one of the most valued brands and reputations in the market. I would be crazy to erase this. Larger competitors don’t agree and would erase the brand. It’s more ego than common business logic, but there you have it. That’s why the owners want to let me have the business, as I will cherish and protect it.
When a seller considers brand, the analysis is similar in nature to the legacy analysis. For example, I was involved with a transport company several years ago. The owners were on the verge of seriously cashing in by selling to a large competitor. However, just prior to completion, one of the owners was driving on the road and saw one of his branded vehicles. That’s when it suddenly hit him: the brand was going to disappear almost overnight and be replaced by that of the larger business. The owner couldn’t bear to think about that and pulled out of the deal, selling instead to management at a significantly reduced price. The management didn’t need any of their own cash to buy the business. They used the balance sheet assets to raise some money – paid some to the seller, invested some to grow the business, and took the rest out for themselves. The owner was happier selling and retaining the brand than cashing in and thereby making his brand extinct.
3) Responsibility to Employees
In the same transport deal, the current employees would have become redundant because the acquiring company had its own workforce. The seller was aware of this and had planned to use a portion of his cash from the deal to look after them. I have seen this done hundreds of times in my career. Most sellers that cash out can’t just lay on the beach with the cash in the bank, worrying that employees who served them loyally over the years are now at risk. These types of sellers do not want to leave their devoted employees unemployed with families to support. It’s a powerful need for these business owners to know that their employees will be protected, and this is something that we need to assure them of during negotiations. Some employees, however, do not like change and leave voluntarily.
Considerations of culture are similar to those related to legacy. Consider this example of one of the largest cultural mismatches in the history of mergers and acquisitions, of which I was a part. In 2003, just before I joined HP as a corporate dealmaker, HP acquired its bitter rival, Compaq. HP was Californian; Compaq hailed from Texas. The cultural differences between the two were stark. Picture the Rotary Club merging with the Hell’s Angels. Suffice to say, the culture clash didn’t work then and HP still suffers to this day. Although the Compaq brand was retained for a long time, and HP still sells Compaq products, the management of the two companies never properly integrated and still have separate sites in operation today. As demonstrated by this case, culture is one of the biggest hurdles to successful acquisitions. People, systems, and processes run businesses, and sometimes the sets just don’t mesh together. If HP had considered the cultural nuances of Compaq and the challenges of integrating that culture into its own, the merger might have turned out differently. Many sellers do consider culture more heavily, as everyone should when negotiating acquisitions.
It is a fact that the price a seller will receive for his business is higher when selling to a large trade competitor. But the trade-off is that the large trade competitor will cut costs and make significant changes (e.g. employee disposal, cultural change, etc.) to drive through the synergy benefits. You need to find sellers who consider and care more about protecting and handing over a legacy than they do about receiving top dollar. It is far easier than you think to find these sellers, and it comes down to (a) originating multiple opportunities and (b) pushing the right buttons in the negotiation to make this work.
Customers hate change. Often a smaller business treats its customers much better than a larger competitor. If your small business has sales revenue of $5 million per year and one customer spends $500,000 per year, you are going to make him, or her feel very special. This is based on how dependent they are to your business. If a $50 million competitor acquires the smaller business and it has many $2 million to $5 million customers, they will be the focus point and the $500,000 per year customer will soon feel very unloved. I have seen it thousands of times.
7) Time frame
Time frame is also to our distinct advantage. A larger trade buyer can take up to 12 months to complete a deal from start to finish; however, as an individual, you are much more agile – especially with me mentoring you! Large companies need full buy-in from all department heads and involve many other checks and balances. As an individual (or as a small team) you can complete a deal in eighteen weeks, from start to finish if it is your primary focus. Larger competitors will need to consult their board and shareholders. Larger competitors have hundreds of other pressing matters to attend to (including running the existing business), and may be looking at an acquisition alongside ten or more others – then play them off against each other. Don’t get me wrong, that’s exactly what we are going to do to get the best deal. However, we can do it much faster, and timeframe is a consideration of the right seller.