Much of the attraction of wildly popular reality TV shows seems to be the drama of watching spectacular failure. Whether it be Donald Trump barking “You’re fired” at a would-be apprentice or judges heaping insults on hapless singing contestants, viewers enjoy watching train wrecks. For those with an extra helping of this rather unfortunate human trait, the mergers and acquisitions advisory business provides an upfront and personal view of mistakes and rejection that would give any of these shows a run for their ratings money. Entrepreneurs looking to sell their businesses can certainly achieve “survivor” or “idol” status but to do so requires avoiding some common mistakes that I see altogether too often in representing buyers and sellers.
Master of the Universe
Confidence, presence and a strong personality are common characteristics of successful entrepreneurs, however outright arrogance is a major turnoff to most acquirers. The old sales mantra that “people buy from people they like” applies as well to marketing a company. I once attended a one-hour first meeting between two CEOs where the aspiring seller spent the first 45 minutes talking about his personal background, replete with his brilliant business moves (stopping just short of developing the cure for world hunger in a bottle) and his trappings of financial success (the houses, the jet, etc.). The buyer gamely managed to sit through this verbal self-monument, but his first words after the meeting were: “That guy could never work for anyone; he has to be master of the universe.” Savvy sellers have a mix of confidence and humbleness that gives the buyer comfort that a transaction and the subsequent integration can be accomplished in a spirit of cooperation rather than in a battle of egos.
Genius with a Thousand Helpers
In buying a business, rather than a piece of technology, acquirers look for a strong, empowered team of sales, technology and operational leaders to reduce “single-point-of-failure” risk. It is not unusual to see highly talented entrepreneurs who have been unable to delegate key functions and trust key client relationships to others in the firm. One of my clients calls this type of situation the “genius with a thousand helpers” and has a difficult time accepting the risk of a substantial business decline should the founder leave the company. Focusing on succession planning and leadership depth is a smart move at any point in a firm’s lifecycle but it pays particular dividends in executing an exit strategy.
My Accountant Does the Numbers
It is amazing how many CEOs simply do not know their firm’s financial numbers. Buyers, particularly publicly traded acquirers, expect their business unit leaders to be highly numbers focused. They do not expect pontifications on the latest FASB release, but they do want to see that executives are fluent in revenue trends, sales backlog and pipeline status, margin structure and key performance indicators. It simply doesn’t cut it to blithely wave a hand while laughing that, “my accountant does the numbers.” A clear grasp of the financials signals a clear grip on the business and provides buyers with greater comfort in the validity of forecasts and in the management skills of the seller.
Delivering financial results that fall short of projections during due diligence derails more deals than any other single issue. Many entrepreneurs feel that buyers will only have interest if presented with a strong upward trend in expected revenue and profitability and are consequently overly-aggressive in these forecasts. The reality is that buyers will pay little attention to long-term projections but will expect that sellers understand their businesses well enough to accurately forecast near-term results. When both sides have agreed on the price and due diligence is in process, one of two things will happen if there is a significant numbers “hiccup:” the buyer will either re-negotiate a lower price or walk away from the transaction entirely. In the latter case, I’ve seen situations where the acquirer would likely have been willing to do the deal had he expected the lower numbers, but the miss triggered concerns of seller dishonesty and/or incompetence. Be realistic, eliminate the “Oops” factor and you will smooth the path to a successful closing.
The Long March of Folly
Publilius Syrus, a classical Roman author, said, “From the mistakes of others, a wise man corrects his own.” Hopefully, this small sampling of common miscues by entrepreneurs will provide vicarious benefits. Many more examples of folly exist, but I am reminded of the words of another Roman, the poet Horace, would said, “In giving advice, I advise you, be short.” Thus, more details will have to wait for the reality TV show.