Why Business Owners Don't Prepare To Sell: Cognitive Dissonance

According to SimplyPsychology.com, cognitive dissonance "refers to a situation involving conflicting attitudes, beliefs or behaviors. This produces a feeling of mental discomfort leading to an alteration in one of the attitudes, beliefs or behaviors to reduce the discomfort and restore balance."

For example, when people smoke (behavior) and they know that smoking causes cancer (cognition), they are in a state of cognitive dissonance. In our case, many Mainstreet business owners (sub $10M rev) intentionally avoid exit planning (behavior), and they know that exit planning will force them to face their professional and personal mortality (cognition). But can anything be done to inspire them into action? Anymore, I don't believe so…at least not much more beyond the endless stream of internet fodder pleading for preparation.

"The human mind treats a new idea the way the body treats a strange protein; it rejects it." — P.D. Medawar (Biologist)

The mind can only see bits and pieces and fills in gaps. How does the business owner weave the story together that prevents them from making an exit planning decision?

Here are some reasons to avoid planning: 

Social relationship consequences - The business owner has developed relationships with everyone internally and externally of that business. These relationships have provided identity and status to compel the business owner from not acting, which will remove neither. It is hard-wired in our biology to seek status; you are not going to rewire evolution.

Confirmation bias - The disregard for the difficulty of magically converting a business into cash leads to this. When business owners hear who has sold a business, they assume that the buyer’s motivations are universally the same. Sellers are lead to believe the path is not riddled with challenges.

Bias blind spot - Business owners (and most everyone else) have a strong and favorable opinion of themselves. As it applies in this forum, the business owner’s bias reflects their abilities as an operator. This bias is why so many businesses fail to survive due diligence. The scrutiny of the business owner's decisions by the purchaser leads to resentment or, more likely, revisiting value and deal structure. No one likes their work (especially their life's work) put under a microscope and contested.

As Mark Chussil writes in his article for the Harvard Business Review, "When you think you know the answer, you sincerely believe it's a waste of time to keep looking for it. It feels like continuing to search for your keys after you've found them." 

Business owners are like that. They believe they know the map on a journey they likely have never been on.

There are three ways to reduce cognitive dissonance:

1. Change one or more of the attitudes, behaviors, beliefs, etc., to make the relationship between the two elements a consonant one.
2. Acquire new information that outweighs the dissonant beliefs.
3. Reduce the importance of the cognitions (i.e., beliefs, attitudes).

Change one or more of the attitudes, behavior, beliefs, etc., to make the relationship between the two elements a consonant one.

There are several reasons why the idea of exit planning can be unappealing to business owners. Many see exit planning as a burden, stealing precious time and attention from the demands of their growing business. Others may view it as a loss of control, especially related to their financial success. In addition, many owners have a deep emotional attachment to their company, which has shaped their identity and place in their community.

Acquire new information that outweighs the dissonant beliefs.

To acquire this new information, I happen to believe that there needs to be a model similar to Zillow where every business owner can see the value of their business as they would see the value of their home at will. This will likely not happen. BizEquity gives it a shot with their BizEstimate, but the business owner must provide the information, so mass adoption seems way far off. Finally, exit planners and their associations have been beating the exit planning drum for many years. Still, I haven't noticed traction in reducing the number of business owners entering the market prepared.

Reduce the importance of the cognitions (i.e., beliefs, attitudes).

"It is difficult to get a man to understand something when his salary depends upon his not understanding it!" - Upton Sinclair

Here is the crux of my argument. Business owners who are entrapped by the day-to-day and inability to delegate the urgent and important are sentenced to chasing premium value like Sisyphus condemned to pushing the rock uphill for all eternity. After nearly seventy episodes of the Defenders of Business Value podcast I have done, the message is clear to improve value: 

1. Business owners need to work themselves out of a job
2. Employees are the most critical value asset
3. Diversification of concentration risks (employee, supplier, customer) improves the deal structure and aggregate business value.

Despite the evidence of preparedness when entering the sale market leads to a better outcome, it is unlikely business owners will pump the breaks on the asset that is delivering their income to understand their true market value that can only be realized doing the one thing they don't want to do: sell. 

So what do we do? I’m going to focus on bringing more tactical tools and educating the unprepared on the hand-to-hand combat they will be forced to encounter on their journey to liquidity. 

*One of those guys I follow regularly, Dan Doran, wrote a very insightful article of a similar vein, "Overcoming the Psychological Biases That Destroy Exit Decisions," last week.