Considerations beyond price when selling a business

I have had the opportunity to interact with a lot of business owners in my life. There is a broad range of perspectives that owners adopt when thinking about their company, from “this organization is family,” literally, in many circumstances, to a detached schoolbook definition “a collection of assets.” I have had personal experience with both views in my life, growing up around a family business and having worked for a considerable time in private equity. I don't think either is right or wrong -- in life, all things are a balancing act.

However, I find many business owners considering a sale of their business fall into a trap of relying upon the formulaic “collection of assets” definition - for two easily understood reasons:

1. Advisors and accountants cannot put a price on emotional investments or personal connections to employees, customers, etc.
2. A sale process is a complicated process, and depersonalizing it can make it mechanically easier; considering the human element of a sale transaction can seriously complicate things, add time and create challenges - particularly for brokers who exclusively seek to maximize price and walk away with a higher fee

Unfortunately, like everything in life, ignoring an issue doesn’t solve it (ask me why I don't get on my scale after Thanksgiving...). In the best case, it delays the consequences and in the worst case, creates a much worse problem down the road. I’ve worked on enough business sale transactions to know one fact which may sound harsh:  A seller gets to pick the price or the terms of a transaction. With this in mind, the problems of ignoring the emotional components of a business manifest:

 “I got the highest price possible” is followed up with:

•  “...and all of my employees were fired… the competitor I sold to only wanted our IP and customer list” or
• “but I am not going to be able to move onto anything else - because the fund doesn’t know the business so they need me to run it.”

I am a capitalist, and I won’t argue for an owner not to consider the dollar proceeds received for transitioning their life’s work. That said, I also hope that business owners don't delude themselves that by ignoring the other considerations which inherently reside in a sale transaction, any future problems will be avoided.

I always try to place myself into the shoes of a business owner when I think of all of the considerations: You’ve spent a generation building and nurturing your business. Now, having decided to sell, you plan on well-deserved retirement. Still, the organization will continue on in some form after the transaction and you still take great pride from the company you built. You want it to continue to grow and thrive. You feel compelled to make sure you leave your business and its employees with a trustworthy, capable, and focused leader.

There are MANY business buyers in the world and each represents a very different offer relative to the continuum laid out above. Three of the most important factors that may seem easy to ignore when you’re hashing out the terms of a transaction but end up having some of the most impact are how your management team will be treated, what the new owner’s intentions for your business are, and how your legacy will ultimately be viewed.

Management

Who will run your business once you step aside? There are two common scenarios but each likely guarantees that the business will not be run with the same focus and intent you committed to it:

• A private equity buyer, for example, may keep the mid-level management hoping they can “play up” or install a new CEO as determined by a consultant without any consideration legitimately given to the fit between the new CEO and your team. The strategic focus objectives of the business will be decided by the private equity fund managers on a quarterly basis, with the purpose of maximizing the value of their assets in total, not just a single component business.
• A strategic buyer – a competitor or one of your suppliers or customers – will often eliminate the business's management altogether. Selling to a strategic buyer usually involves not so much a change in the management of your business, but is an absorption into the acquiring business management.  

In both cases, neither will devote the same degree of attention to the management of the acquired business as you will either be one piece of a larger portfolio or division

A search fund like, Torchpass Management, exists to acquire a single business and to personally assume the responsibility for leadership from the owner and draw on the experience of the current management in consultation with my investors - who are all successful entrepreneurs and business operators themselves. In terms of business management, selling to a search fund is a transfer of responsibility alongside with ownership, rather than a fundamental shift that accompanies the other categories of buyers.

Ownership Timeline

You’re selling your business after you’ve invested years of your life into growing it. If you care about seeing your business grow and thrive after you sell it, then the long-term intentions a buyer has likely matter.

• Private equity funds are legally required to invest the money in a set period of time (typically five years) and to “harvest” those assets in a subsequent set of five years. Private equity buyers frequently acquire businesses with a clear view on who the business will be sold to - even before they’ve purchased the business.
• Strategic buyers typically do acquire businesses to complement their own and are less prone to the problems that manifest from buying a business to sell. Strategic acquirers suffer from a problem of rose-colored glasses when conducting an acquisition, presuming everything will work out smoothly. When things don’t go well, the human consequences play out with seriously detrimental consequences: At best, the manager who recommended the investment will lose influence among the other decision makers at the firm, and at worst, be fired. The term “corporate orphan” exists to specifically describe this kind of outcome.

In significant contrast, a business owner can have reasonable certainty that a search fund led by a young entrepreneur, purchases a business intending to run and grow it in its own right, as the entrepreneur effectively has options which vest upon the growth of the business. My investors have backed me to grow an organization - not simply occupy a seat. The search fund business model is one that succeeds with growth, not extracting value through clever financial structuring, fees and debt assumed by the business to pay the investors out.

Legacy

Successful business people know not to approach commercial decisions with too much emotion. And yet, many business leaders also take justifiable pride not just in the financial value they've created over the years, but also in the culture, relationships, and community their business has supported. Businesses serve an essential societal function. That financial success feeds families, funds charities, and pays for the upkeep of roads, schools, and other community infrastructure. Businesses and their leaders come to be associated with these contributions, and communities in turn come to rely on the businesses as part of the social fabric.

In selling a business, many owners hope to ensure the strong community bonds they've fostered will be preserved. The bitter pill they often must swallow, however, is that buyers do not necessarily place the same value on those bonds. Private equity professionals and your competitors’ managers are not heartless. They simply lack the same personal investment of time and care in the business as the owner. The detachment is often a necessary mindset for buyers who are incentivized to maximize short term profits. That incentive is great, but becomes problematic when the local conditions aren’t considered in the interest for higher profits in a different geography.

In contrast to many other types of buyers, search funds have an inherent bias in favor of preserving the legacy of a business and its former owner. Especially early - the most valuable asset that a new business owner has is the goodwill passed along from the selling owner - and paying the appropriate homage to the prior owner cultivates a positive environment. Of course, some aspects of any business change with new leadership.

The legacy of heroes is the memory of a great name and the inheritance of a great example. - Benjamin Disraeli

How I view these considerations

In my own life, I’ve been able to learn certain time-tested lessons for myself - but one trope that rings particularly true is: there is no get rich quick scheme in life - there are always trade-off's. Success with any endeavor demands focus, long-term persistence, and a considerable degree of luck. I hope I am able to invest in a business where the seller has demonstrated their wealth was well-earned by displaying focus, persistence and wasn’t above taking advantage of good luck laid in front of them. As important as receiving a well-earned financial reward for that toil, I hope I work with a seller who recognizes that so much of their risk and investment was in factors beyond pure financial investments and considers the impact on their team, the enduring reputation of their business, and their own legacy when evaluating an offer.

Torchpass Management is an entrepreneurial vehicle with a mission that's somewhat unusual in the business world. I’m looking to acquire a great business which I can steward with the support of the remaining team and my thoughtful investors. I genuinely seek to enable a business's owner to "pass the torch" to the next generation of leadership in a manner that both provides for a fair price, but also the satisfaction that comes from knowing that the original purpose and commitment to the business have been taken up and will be carried forward with care.