My last post grew out of a Ben Franklin quote, so it seemed only fitting to follow with a post inspired by Thomas Jefferson. In the last several months, three of the companies where I participate as an advisor and board member, all decided to launch banker-led processes to sell their businesses. Jefferson reminded me of several aspects of the process that are important to keep in mind.
Thomas Jefferson advised to make complex ideas simple to ensure they resonate with a broader audience. Businesses are complicated, and nearly every business encompasses a range of operations, some core and some context, and some that really do not belong. What may have started as a clear idea and inspiration, over time will often morph into a complex entity. The challenge when selling the business is to create a clear message and to simplify the complexity so that potential buyers know what is being offered. In order to craft a simple message, you have to know who you are speaking with. Just as in corporate marketing, you have to identify the ideal customer profile (ICP), and create a compelling message that resonates with the ICP. If there are multiple lines of business, what is compelling for one ICP may be a turn off for another. What may motivate a strategic buyer may have a different value for a financial buyer. There may be elements of the business that seem to make sense in an operating context, but nobody values in a sale process. I have seen instances where the buyer is willing to pay one price for the total business, but if the seller will eliminate a component, the buyer will actually pay more. The element in question was so offensive that the buyer knew it would be a distraction that would waste resources and complicate the corporate integration, so it actually had negative value and reduced the value of the deal.
A fuzzy offering with a complex description can be fatal to a sale process. Buyers have a hard time establishing a value when the business description is muddled due to misfit pieces. They assume the seller is thinking in terms of a simple multiple of the whole, but the buyers only value parts, so they conclude they will not reach a clearing price and back away entirely. Alternatively, if the business looks too complicated or nuanced, buyers may just not want the hassle of figuring it out. The same is true for investment bankers. Companies with complex or inarticulate business descriptions often have difficulty finding an investment banker willing to take the assignment. If the banker cannot understand the business clearly enough to articulate the strategy and value, then they know that the engagement will be challenging or result in offers below the owners’ clearing price, so it is not worth their time. Unfortunately, if a banker who does not fully understand the business decides to engage, everyone usually ends up frustrated. When the banker cannot articulate the strategy and value proposition, they resort to a numbers game. They create a book, send it to a hundred usual suspects, hope some of them figure it out and engage, then they focus on the financials rather than the strategic value of the business. Not a formula for a great outcome.
Jefferson also said that “good dinner makes good conversation.” He valued the conversation during meals as a unique opportunity to build understanding. The corporate sale process is a courtship leading to a marriage. To maximize value, the buyer and the seller have to get to know each other and build rapport. In our age of video meetings, we lose a lot of the opportunities to just spend time together and become friends and colleagues. Sharing a meal in an informal setting is an important element that can increase the likelihood of a deal and even increase the price paid. Never overlook the cultural component of getting a deal done, and the importance of the buyer and seller becoming comfortable with each other. I recently observed a process that came down to two serious buyers. The seller’s CEO and executive team spent time (and meals) with one potential buyer, and built a positive rapport. The other buyer stayed on video and focused exclusively on the due diligence rather than the culture. As the process proceeded, the seller’s team subtly and unconsciously conveyed their enthusiasm for one buyer and their lack of enthusiasm for the other. The offers ultimately were wildly different, with the favored buyer on the high end. Maybe it was a result of actual differences in perceived value, but I suspect the lack of ‘meal time’ and rapport building played a decisive role in the price disparity.
Jefferson famously said “never put off till tomorrow what you can do today," which emphasizes the importance of staying focused and taking action promptly. Deals are like sharks; if they are not moving forward, they are dying. Once a sale process begins, urgency has to be the driving force for the seller. Stuff happens. The longer things stretch out, the greater the likelihood that something will happen that adversely impacts the transaction. It could be something in the business such as an important client churns, or it could be a completely external macro economic change like tariffs, or conflict, or any number of unforeseen events. Do not leave any time for bad things to occur.
One last Jefferson quote to guide us through the sale process. As stated above, stuff happens while the process is unfolding. The objective of the due diligence process is to confirm truths and discover faults and weaknesses. For the seller, it is like being on trial, having to explain and defend decisions, results, conclusions, etc. For the buyer, it can be an alarming time when discoveries rattle your commitment to proceed with the deal. Jefferson advised to “always take hold of things by the smooth handle grateful that they are not worse, rather than the rough handle bitter that they are not better.’ With this saying, he encouraged a calm and constructive approach to challenges, and an optimistic positive attitude to move forward. He stressed the importance of leadership that balances inspiration with practical action. Diligence is a time when it is easy to become alarmed and act emotionally. Keeping the ‘smooth handle’ in mind provides the opportunity for calm analysis. In Jefferson’s view, “to learn, you have to listen. To improve, you have to try.” Good words to bring calm into the process.