According to informal interviews with business owners who sold all or portions of their companies, the determination to sell was among the most difficult decisions in their lifetimes.
Most indicated they made errors along the way, though few wished to undo their transactions. Some sold the business for too little. Others fought for the highest price only to see unwanted post-closing consequences unfold for employees. Some sold too soon. Others held on for too long. Some accepted more post-closing risks than they should have. All reported they paid too much in taxes. The common lament from former owners was: “I wish I knew then what I know now. I would have done things differently.”
Why is it so hard for owners to make wise selling decisions? Several issues regularly arise:
1. Emotions. Owners are deeply connected to their companies. Most say the business is a part of themselves, or like a child or significant other. Consequently, emotions and feelings frequently obscure objective decision-making.
2. Unfamiliarity with the private capital marketplace. Many owners are not acquainted with the private capital marketplace, which is where most privately held businesses will be sold. Owners may not know who the right buyers are or even the array of options available to them. Unfamiliarity causes some to believe only unsatisfactory options exist. In such cases, the decision to sell is simply no, but it may be based on misinformation or wrong assumptions.
3. Non-ordinary business activity. M&A transactions are far outside the scope of normal business activities and can be disruptive, requiring hundreds of hours of preparation. Since the normal state of most companies is already busy, M&A asks for time and attention many owners don’t have or are reluctant to give.
4. Professional adviser issues. Owners of privately held middle-market businesses need professional advice to enable wise selling decisions, but three things stand in the way of good counsel:
• Confidentiality/privacy. Owners are fiercely protective of confidential business information. Therefore, owners are cautious and keep their thoughts private, even from trusted advisers like their attorney and/or CPA.
• Loyalty to nonspecialists. M&A is a specialty within the practices of law, accounting and taxation. Unfortunately, owners resist such counsel due to loyalties with long-time trusted attorneys and/or CPAs who may not be optimally positioned to counsel on M&A matters.
• Frugality. Long-embedded cash preservation habits often prevent owners from seeking professional M&A advice. Consequently, knowledgeable advisers are not given the opportunity to provide meaningful guidance.
5. Procrastination and resistance to change. Few people are comfortable with change, and unless there is a compelling vision driving the owner to new challenges, it’s hard to let go of the status quo. For some, a sale is a concession to age and mortality, so it is put off for as long as possible. But the lack of preparation in a business can’t be fixed quickly. It takes years. Therefore, transaction planning should begin years before the sale occurs.
While selling decisions are difficult, they must be made. Transition planning is a foundational duty of ownership. Searching one’s heart and mind early in the process is key. There, they’ll uncover insights foundational to constructing an outcome ideal for themselves, their team and the future of the business.
Sara leads Blue River’s Buyside Advisory Practice.
