Living and leaving the legacy
By Harry S. Dennis III, for SBT
The year 2002 is now history. A significant happening that my TEC colleagues and I witnessed this past year was an increase in the number of TEC members who sold or merged their businesses.
Are you a candidate to possibly sell your business in 2003? I’ve had the opportunity to spend time with some CEOs who, in retrospect, learned some lessons from the selling process. As we login this year, I would like to share some of their observations and experiences with you.
First, make a decision up front: Will you seek a strategic buyer, a financial buyer, or do you care? It’s tougher to land a strategic buyer — typically, a competitor. But the buyout multiple can be up to twice that of a financial buyer.
Second, decide how you will "market" the company. You can go the "quick and dirty" route, attend any number of "how to sell your business seminars," and broker out your business in a bid-style environment.
Or, you can approach any number of financial intermediaries who can help you prepare your business, and the way it is presented, for sale. In my opinion, both Milwaukee and Chicago have a number of qualified firms that can effectively meet this objective. It will cost you more, to be sure, but when the sun sets on the process, you will get more bang for your invested buck.
Third, early on communication with key employees must be a pre-thought, not an after-thought. You need them on your side from the outset. Even if it means that if the firm is sold, their jobs will be in jeopardy. There are things you can do up front to soften the landing for those employees who are especially vulnerable, such as guarantee termination bonuses, executive outplacement, short-term management contracts, etc.
Fourth, the reason for your sale needs to be communicated to your entire organization. Most companies don’t just wake up one day and exhort, "I’m for sale." Usually, there are valid and plausible circumstances behind the decision to sell. Here’s a short list of the ones TEC members have experienced most frequently:
1. The owner is retiring and there is no one to inherit the business and there is no one capable of assuming a CEO role within the business.
2. The owner has died and the company must be sold to satisfy estate requirements.
3. Industry consolidation is making it impossible for the firm to continue to compete as an independent. If not merged, it will go out of business sooner or later.
4. Outside investor groups with majority control have exercised a "put" on the business for whatever reason, and regardless of management’s opinion, have forced a sale.
5. The company lacks the necessary capital resources to compete and survive, or its technology and processes have been made obsolete by competitive innovation, or both.
6. The ownership simply wants to "smell the roses" and believes that a timely sale of the business will make that possible.
Fifth, preparing to sell means preparing for due diligence. And this is where too many companies fall flat on their faces. The worse case is the "errors and omission" scenario. Management claims such things as:
— Accounts receivables are as stated.
— Inventories are not over or under stated.
— Fixed assets are in the reported condition.
— Expired patents are accounted for.
— Impending liabilities, especially environmental and regulatory issues, are documented.
— Customer lists and current volume levels are accurate.
— Unfunded liabilities are balance sheet current.
— Employee deferred and termination agreements are documented.
— Vendor long-term contracts are documented.
— Lease agreements (equipment and property) are documented.
— Labor agreements and contractual amendments are current.
— Joint ventures and other collaborative third-party arrangements are defined and documented.
If you have been through a due-diligence exercise, you can probably add to the list. An astute buyer will hang disclaimers on a purchase for any area that constitutes a post disclosure. It can be expensive and dramatically alter the terms of the sale. In short, do your due diligence before negotiations, not afterward.
Sixth, be prepared for this buyer ploy: "John, you have been critical to your company’s success. We would like you to stay on for a year and enable a smooth transition. Keep your office; do as you did." The reality is that it is not healthy for you or for your business or for your employees. You can’t be a lame duck CEO. And believe me, it will tear your heart out as you begin to realize that you have achieved manikin status. Better to make the break right off the bat. Insist that the new CEO be in place the day the sale is consummated.
Over the holidays, I attended an employee Christmas party held by a TEC member. The sale of his business had closed literally a few days before the holiday gathering. A couple hundred employees and friends attended.
I was very impressed, not only by his candid remarks and farewell to his people, but by the vocal admiration given to him for the manner in which he had presided over this company, since becoming CEO several years ago.
Sure, there was sadness in their air. A manager with 25 years’ experience here, an hourly employee with 30 years’ experience there. But they were all grateful. They were grateful for a leadership that treated them with total respect and dignity in this entire process. Until next month, good selling, if 2003 is your year!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-831-3340.
Feb. 21, 2003 Small Business Times, Milwaukee
