A FEW MONTHS AFTER TRC went on the market, my broker was pushing me to submit our material to CDW, a Chicago technology reseller that was one of the first to service the IT industry. CDW’s founder, Michael Krazny, was an incredibly successful businessman, who had taken his company from a kitchen-table outline to a multibillion-dollar enterprise in just 14 years. In 1998, Krazny and I had discussed the idea of CDW acquiring my business, with the goal of pushing TRC’s revenue to the $100 million mark in just five years. At the time, my vision simply wasn’t broad enough to grasp what Krazny was proposing, and I really wasn’t ready to sell my business. Sensing my fear and uncertainty, Krazny had killed the deal and gracefully let me go.
Now that I was ready to sell, I told my broker not to send information about TRC to Krazny’s company. I didn’t think CDW needed TRC, and I didn’t want to discuss the details of our innovations with this huge competitor. CDW was leading the industry, with $7 billion in annual sales and a regular slot on the Fortune 100 list. My plan was to partner with the number-two or -three player in the market to challenge Krazny’s dominant position. But CDW was flush with cash and in the mood to buy in 2005, and it was being very vocal in the press about it. Knowing this, my broker pressed me to submit our teaser prospectus to CDW, and I reluctantly agreed. A week after our material landed on the desk of CDW’s director of higher education, we were invited to the home office.
To my utter surprise, conversations went remarkably well, and I could sense a chemistry developing between our companies. We were speaking the same language and sharing the same customer pain points. Our intellectual property would overcome major obstacles that CDW could not address on its own. In the end, both CDW and TRC were anxious to move forward with a deal. It was time to take a seat at the negotiations table.
As you’re about to learn, after you receive an actual offer for your business, negotiating the sale is one of the toughest jobs you’ll have as an entrepreneur and a business owner. You and your buyer will discuss and investigate and weigh many different factors in determining the worth of your company, including employment agreements, perks and benefits, salary, asset exclusion, and so on. You don’t have to face this task alone, and you probably shouldn’t. Negotiating is an art, and I recommend that you hire the services of a professional negotiator to help you navigate the process. This may be your only chance to sell a business, and you want to make it count. Even then, however, your role remains critical throughout the process. You have to be on your toes to ensure the negotiations go well.
After you’ve negotiated the deal, you still have a major hurdle to overcome—the due diligence process, in which every minute detail of your organization’s financial and legal dealings, holdings, and issues will come under intense scrutiny. As you learned in the previous chapter, thorough and accurate record keeping from day one in your business is your strongest tool for preparing to move through the due diligence process with minimal hassle. In this chapter, you’ll learn about the painful stumbling blocks I experienced during the diligence stage of my own sale. I hope that story will encourage you to start your preparations for due diligence early, and to monitor their progress carefully through every preceding phase of your experience. As I said early in this book, you need to start planning for the sale of your business soon after you start planning to launch it.
In addition to my cautionary tales, this chapter offers some substantial tools for closing the sale of your business. Here, I’ll walk you through an overview of each of the analyses you and your buyer will conduct to determine the value of your business. I’ve also included the most useful weapon you can have in your negotiations arsenal—the Negotiation Worksheet. By following the steps outlined in the worksheet, you don’t have to worry about leaving money on the table at the end of your negotiations. This chapter also offers some sound advice about breaking the news of your sale to your staff, customers, and marketplace. I’ll finish this final chapter of the book by sharing with you the personal perspective I gained as I reached the end of my first and most educational entrepreneurial journey.
When you begin negotiating the deal for the sale of your business, valuation takes center stage. Deriving your company’s value is a two-part process, involving both a financial analysis and an intrinsic value analysis. The buyer is going to review the financial performance and condition of your company to establish a benchmark accounting evaluation of worth. The far less quantitative intrinsic value analysis comes next, with the purpose of assigning a value to assets such as brand name, patents, rights, agreements, contracts, talent, and so forth. The buyer will consider both factors and then make an offer, applying a multiple to either the calculated revenue or profitability if the buyer chooses to buy at a premium predicting higher future earnings (based on your historical financials). The buyer is inclined to make a below-market offer if such financials dictate. You probably won’t be calculating these values or applying any of these methods yourself, but your sales advisors (attorney, negotiator, accountant, and so on) will; the more you know about these methods, the better able you’ll be to translate and use their results in the negotiations for your company’s sale. Let’s dig deeper into each of these analyses.
The Financial Analysis
Understanding the value of a business, particularly a privately held business, is not as simple as you might assume; in fact, many business owners find the whole process to be a mystery. The truth is, however, that the financial evaluation is a very black-and-white process that can involve applying one or more accounting methods or tools to establish a company’s value. Here, we’ll explore the more common of these, including comparable worth, EBITDA, asset valuation, financial performance measures, and multipliers.
The Comparable Worth Method
The comparable worth method is a rather simplistic (often pre-acquisition) means for finding businesses comparable to your own and using their worth as a rough template for estimating your company’s worth. You might use the sale price of a competitor with revenues similar to those of your organization, for example, as a comparison. This method has obvious weaknesses because it fails to take the firm’s profitability into consideration. However, it can spur competitive offers or urgency when acquirers see buyer interest within a certain industry.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Your business will generate monthly or quarterly balance sheets, income, and cash flow statements, which you’ll monitor in order to track business performance. But you also should be monitoring regular EBITDA statements for your business. EBITDA (earnings before interest, taxes, depreciation, and amortization) is ignored by many owners of privately held businesses; it’s typically used as a valuation tool rather than an operational tool, and operations are the focus of the entrepreneur in the trenches. You should use EBITDA as a monthly operational tool or as a dashboard metric because it’s one of your most reliable means for monitoring the profitability of your business. Your potential buyers most certainly will use EBITDA to establish the value of your business. Even if other valuation methods are introduced by you or the seller, EBITDA represents the clearest picture of overall value.
A FINANCIAL REPORT IS JUST THE BEGINNING
No savvy buyer will rely on a publicly held company’s financial reports in evaluating that company’s worth. The management of a publicly held company typically strives to show high earnings on the company’s financial reports in order to attract people to buy its stock and, in the process, improve its price-to-earnings ratio. On the other hand, a company’s management team may be working to minimize the earnings shown on the business’s financial reports in order to minimize its tax burden. Financial reports really serve as a basis to ask questions about the business, its history, and its strategies to arrive at an appropriate financial valuation.
The Asset Valuation Method
The asset valuation method simply assigns a worth to the hard assets of your company. This method is used when a large portion of a firm’s value is pegged to its fixed assets, but it’s the least desirable method for establishing the value of the business. Think of a business that wanted to start producing steel; the founders would have a choice of building a new steel mill or buying one ready to go. When considering the value of an existing steel mill, these buyers couldn’t just look at the current, depreciated value of the assets; they would have to consider the overall “cost of reproduction,” which would involve constructing the same assets, only at current prices.
Buyers also must consider the true cost of replacement for assets they’re considering for purchase. In addition to the costs of current prices, replacing existing assets would take a great deal of time, so buyers must calculate that delay into their valuations. These considerations are what led Significant Education, LLC, to acquire the assets of struggling Grand Canyon University in 2004, which, overnight, made Significant Education the owner of an entire college campus. The company took the college public in 2008 and established it as the sixth-largest online university in the country.
Financial Performance Measures
Financial performance measures review historical results of a business in order to predict its future performance. These are the most common and accepted methods for determining the value of a business because they help a buyer understand what the business will be worth after the closing. The most common financial performance methods include net present value (NPV), internal rate of return (IRR), discounted cash flow, and return on investment (ROI). You (and your buyer) should use all of these models when establishing an evaluation of your business. Your broker, your attorney, or other professionals assisting you in the negotiation and sales process can help you produce and apply these models.
Multipliers
Multipliers are figures used to calculate the projected future worth of a company based on its historical performance. A multiplier is a figure used to multiply accounting evaluations like EBITDA, revenue, or even earnings to generate the value one would pay today for the enterprise. The multiplier can be subjective, but it is often a balance between historical industry averages of comparable competitor sales and the net present value of money associated with the buyer’s desired return on investment. A buyer might offer to purchase a software company at a price 10 times the company’s current EBITDA value; in that case, the buyer would use a multiplier of 10.
Since EBITDA does not take into account buyer benefits from the economies of scale, market conditions, intellectual property, internal motivation and goals of both buyer and seller, or other factors not explicit to the financial analysis, the multiplier must be great enough to increase the EBITDA adequately to account for that missing value. In your sale, your ability to negotiate will determine how large the multiplier is that will calculate the value of your business.
I typically refer to intrinsic-value items as intellectual property or IP. The IP of a company is what separates it from its competition, and it will be the factor that most influences the final valuation of the firm. IP can take various forms, including distribution methods, copyrights, business processes and methodology, technology, brand, and patents, in addition to the many other differentiators we’ve discussed in previous chapters. I’ve stressed the importance of focusing on innovation and developing your company’s IP throughout this book, and nowhere will the value of that advice be more evident than when you come to the negotiating table. During your Startup and Running phases, your firm’s IP was its strongest tool for attracting customers and differentiating your organization from its competition; in the Exit phase, that IP also pays dividends by boosting the ultimate valuation of your organization.
Several models for determining intrinsic value exist, but most apply to public equity. If you’re selling a small- to medium-size private firm, you will need to use a multiplier to increase the strictly derived financial valuation of your IP in order to take into account its intrinsic value. This process becomes very subjective, which is to the benefit of the savvy seller. Of course, accountants and CFOs do not like subjectivity. In their calculations, they prefer that each number is supported by strict mathematical reasoning. That’s why I created the Negotiations Worksheet. Although it does not remove all subjectivity, the worksheet can help you merge the financial and intrinsic valuations of your organization; it also establishes sound metrics to support some of the more subjective numbers involved in your analyses.
As the seller in negotiations, you really don’t know what you leave on the table. But I’m confident that I may have walked away from millions when I sold TRC. That’s just one of the reasons I created the Negotiations Worksheet. I offer it here as a tool for managing your own negotiation process. Before we get into the use of the worksheet, though, I’d like to share with you my costly negotiation mistake; this may seem like a hand-wringing confession, but I think it’s a story that offers a valuable lesson about the pitfalls of the negotiating process.
The preliminary discussions about the sale of my company had gone well and were moving along quickly. CDW was anxious to seal the deal, and so was I. But when the offer from CDW’s acquisition team was on my broker’s desk, things broke down for TRC. Although I had explored the selling process on and off through the years, I was by no means an expert. I hired a broker to help me manage the sale, and I naively believed I could leave the details up to him.
Not only was I naïve; I was exhausted. As you’ll learn when you sell your business, managing the Exit phase is a full-time job that you have to take on while you are still running your company. I had just resolved a lawsuit with my previous equity partner, and that process had been an emotional drain on me. (As I told you earlier in the book, I failed to use a legal agreement for these arrangements, and this was the painful outcome of that mistake.) Further, we had been on the market for a while before receiving the CDW offer, and I desperately wanted this deal to happen.
My broker told me repeatedly, “When the right offer comes around, you’ll know it, and you’ll want it bad.” That’s exactly what happened. CDW’s offer was all cash, meaning there would be no financing delays, earn-out requirements, stock options, or other clauses. To make the deal seem even sweeter, CDW was located in our area, which would ease the transition process for my employees. The more I learned about the offer, the better it seemed. And that’s when I made two fundamental mistakes that I’m sure cost me money.
First, I didn’t closely manage my broker and others who were running my side of the transaction. You can’t afford to let that happen in your dealings. Your sales advisors—your lawyer, accountant, and broker—view your exit from the business as a transaction on which they will be paid. Lawyers get paid as long as the deal is open; the broker gets paid when the deal is done. These people see many deals die at the negotiations table, and so are well versed in ways to keep that from happening. It will be easy for you, just like me, to get emotionally wrapped up in the entire sale process and then become completely reliant on your broker’s experience to close the deal. You have to get your emotions under control so you can maintain a management role in the negotiations process. No one else will care as much as you do about the final outcome of your business.
CDW made the offer first in our negotiations, which was to TRC’s advantage (you never want to be the first to extend an offer in the negotiation process; it establishes a benchmark for the other party). That’s when I made my second, costly mistake: TRC did not counter. CDW’s offer was a generous multiple of our projected EBITDA at closing, which was scheduled for June 2006. My broker said it was a good offer, and we should take it. In my gut, I knew we should counter, but I feared losing the deal, so I agreed. I allowed my “expert” broker to bypass this crucial step—one I’m sure our buyer was anticipating. We accepted the offer, scheduled a closing date, and started due diligence. There is no doubt in my mind that if we had countered with a higher price we would have fetched more for the company. I blew Negotiations 101—and I was using a broker!
Since making those costly errors, I’ve had the opportunity to study my experience and learn from professionals who train and conduct negotiations. That research helped me create the Negotiations Worksheet and the process for using it that I’m about to describe to you as a methodology to structure the selling process, hold emotions at bay, and strengthen the negotiating position. Let me show you how it works.
The Negotiations Worksheet, shown in figure 15.1, is a tool you, the seller, will use throughout the negotiation process to logically calculate your organization’s financial and intrinsic valuation. Its purpose is to garner the highest valuation by documenting your organization’s many individual intrinsic IP (intellectual property) items, assigning them their own multiplier, and using it to calculate their value. The more individual IP elements your organization can measure, the greater will be your chances of negotiating a higher overall value and identifying which of your company’s features resonate most strongly with your buyer.
Figure 15.1: The Negotiations Worksheet.
To effectively negotiate you need to know who you are negotiating with, so make a point of learning the roles and titles of all those involved on the Buyer’s side of the negotiations. Typically, the Buyer will delegate the financial assessment and review to a “numbers person”—the accountant, CFO, or other number-cruncher who is familiar with financial models. The Buyer will use that expert to assess your financials and formulate an initial offer. Determine the role the financial reviewer will play in setting and countering an offer, and how much influence the reviewer will wield in determining whether to move forward with the deal.
The person on the Buyer side reviewing the intrinsic value of your business often holds the greatest ownership of the acquisition and is likely the decision maker. The financial valuation will be fairly rigid and straightforward. The greatest leverage and basis for negotiation, therefore, will come from the intrinsic side and the decision maker assigned to its review. In other words, the decision maker will be most influenced by the financial evaluation, but most attracted to the intrinsic variables. This person holds the greatest influence in swaying the Buyer’s overall opinion; your job as the Seller is to convince the decision maker of the intrinsic value of your business. The Negotiations Worksheet gives you some concrete data with which to do that.
1. Now, let’s break down the use of this worksheet by following this step-by-step example, in which you are the Seller.
2. Prior to an offer, you, the Seller, will:
a. Complete as many financial evaluation models as possible, list them in the Financial Analysis section of this worksheet with results posted under the “Seller” section to establish benchmarks, and determine which is the most and least favorable model to you as the Seller (see callout a, figure 15.2).
Figure 15.2: The Financial Analysis section of the Negotiations Worksheet.
b. Research historic industry multipliers applied to the sale of similar companies in your industry. This information may be difficult to obtain; your accountant, lawyer, or broker should be able to find published industry benchmarks. Place the multiplier in the Industry Multiplier column, in the row next to the financial valuation method you have used (see callout b, figure 15.2). EBITDA (highlighted row) will likely be the Financial Analysis method your Buyer uses, and it is the default when the typical industry method is unknown.
c. Line-list all of the intellectual property items about your company in the Intrinsic Value Analysis portion of the worksheet (see callout c, figure 15.3). You will place an “X” or checkmark in the corresponding cell in the Seller column to designate that these intrinsic items were identified by you.
Figure 15.3: The Intrinsic Analysis section of the Negotiations Worksheet.
2. When the Buyer makes an offer, you will:
a. Document that offer on the Buyer’s portion of the work-sheet;
b. Verify which financial analysis method the Buyer used to arrive at the offer and if the price reflects both financial and intrinsic valuations. Ask what multiplier, if any, the Buyer applied. You can use this information to dissect the offer to establish what premium the Buyer has placed on your company’s intrinsic value. Any amount above the figure calculated using the stated financial model will represent the premium for intrinsic items and/or the multiple. It is critical to get the buyer to disclose if intrinsic items were recognized or not as this will influence your negotiations.
c. If the Buyer has included intrinsic value in determining a valuation for your company, you need to skillfully ask the Buyer to identify the items included in that valuation; then, make sure all of those items are listed in the Intrinsic Value Analysis section of the worksheet, and marked with an “X” or checkmark in the corresponding Buyer’s column. At this point, the worksheet will begin to reveal some interesting information. In our scenario, illustrated in figure 15.4, the Buyer has calculated a $3.5 million EBITDA with a multiplier of 3, while the Seller’s research has established a $4 million EBITDA and an industry multiplier of 4. Further, the Buyer identified seven items of relevant intrinsic value, whereas the Seller listed five. Even more relevantly, the Buyer identified five intrinsic items not included in the Seller’s listing, meaning the Seller didn’t recognize them as meaningful IP.
Figure 15.4: The Negotiations Worksheet highlights discrepancies between Buyer and Seller valuations, based on multipliers and the itemization of intrinsic value.
3. As the Seller, you will now review the Buyer’s offer and formulate a strategic response giving consideration to the following questions:
a. Why does the Buyer’s financial valuation not match yours, and why did the Buyer choose this valuation method? Perhaps they were missing some data. In that case, you can provide that information to help them correct their calculation to your findings. If they’ve used a different method that produced a less favorable result, you will need to negotiate in order to convince them to use your favored method or to arrive at a compromise.
b. Why does the Buyer’s multiplier not match the historic industry multiplier? Ask the Buyer to explain how they arrived at that multiplier, and be prepared to defend yours. Had their multiplier been higher than the one you’d selected, you should consider negotiating an even higher multiplier at this point. If at a minimum you wish to arrive at your multiple of 4, you may counter with 5, but this will be just one area of consideration to your counter offer.
c. Why did the Buyer’s list of IP items not match yours? Discuss these discrepancies to fully understand why the Buyer values items you overlooked, and overlooked items that you listed. You can use that information to strengthen your position during negotiations.
d. Why does the Buyer want your company? You would be surprised at how often this question isn’t addressed. The answer will help establish how much of a financial, versus strategic, acquisition this is for the Buyer. The more strategic the Buyer’s interest, the greater the value of the intrinsic components of your organization will be. This is where you will gain knowledge of the importance of your specific IP and how to leverage it in negotiations. You may even ask the Buyer to rank the IP in order of importance (they may not agree to that request, but it’s worth asking). Even if the Buyer states that his or her only interest is in revenue and profits, you have to remember that your organization’s revenues and profits are derived from its intellectual property, and therefore, the value of those items must be considered in determining the overall value of your business.
e. What pain will this acquisition eliminate for the Buyer? The root of any acquisition is to eliminate or elevate a pain found within the Buyer’s organization. The pain may be growth, profitability, geography, customer types, product diversification, talent, or IP acquisition.
f. How will the Buyer finance the purchase? Many acquisitions fall apart in the final hours because the buyer is unable to obtain the required financing. Thus, it is in the Seller’s best interest to understand how the deal is being financed and how secure the financing is. In some cases, it may be better to take a lower all-cash offer to ensure the deal gets done.
g. Is there anything else the Buyer would have liked to have seen about your company? You may be surprised by their response and find that you have or can easily provide the value they seek through your own efforts.
4. Use the Buyer’s answers to your questions to complete the worksheet, then use all of that information to formulate your first counter offer. The questions you’ve asked will enable you to gain some picture of the Buyer’s interest in your company and valuation of your organization’s IP. Complete the worksheet by adding separate multipliers to each line item of intrinsic value, adding a higher valuation to those items clearly identified by the Buyer as being significant and a lower value to those the Buyer shows less interest in.
5. Make a counter offer, using the Buyer’s responses and other worksheet data as your justification. You have multiple negotiating options at this stage. You can:
a. Negotiate the EBITDA calculation (see callout a, figure 15.5);
b. Negotiate the financial analysis multiple (see callout b, figure 15.5);
c. Negotiate on each intrinsic item listed, and request the Buyer to respond to each in their counter offer. As strategy, you could list a fractional multiplier, such as 1.07, with the intent of negotiating down to 1.5 or 1.0 (see callout c, figure 15.5).
Figure 15.5: Using fractional multipliers on the Negotiations Worksheet.
Getting the Most From the Worksheet
The intent of the worksheet is to formulate a logical and defensible response during negotiations. The worksheet also gives you a chance to broaden the field of negotiation by including multiple items over which you can negotiate, rather than limiting negotiations strictly to the financial analysis and a single, subjective, intrinsic value analysis. Having multiple negotiation items increases your opportunities for reaching a compromise, which will have the net effect of boosting the overall value. You can use the worksheet to direct your questions and, in the process, to get the Buyer to talk about why they want to make the acquisition, and what they value most about the company. With that information, you’re better prepared to direct your negotiation strategy and tactics. The Buyer’s responses on the worksheet create a dashboard to drive negotiations.
The more items in the Intrinsic Analysis section of the worksheet, the stronger your position. A buyer may reject a higher multiple on three line items but concede on the fourth. When multiples are used, incorporating fractions instead of whole numbers will aid the process. If the Buyer is firm on a 5 times multiple and won’t go to 6, ask for 5.7 or 5.5. It may seem insignificant, but its effect can be dramatic.
Certainly all negotiations are unique, just as each company is unique. You’ll have to use your best reasoning and negotiating skills to choose and apply multiples, and for arriving at a final price from your calculations. But the worksheet gives you a valuable tool in managing these negotiations, by giving you and your Buyer a tangible, itemized analysis of the value of your organization. By using the detailed analysis this worksheet provides, you’ll be better able to maximize your shareholder value and the personal wealth generated from this sale.
When you’ve negotiated the deal, the due diligence process is the last thing standing between you and your check, and it is by far the least favorable aspect of selling a business. The purpose of due diligence is to investigate all nooks and crannies of the company being acquired to uncover missing facts or information that may cause expense or legal exposure down the road for the acquiring firm. As I mentioned earlier, this is the moment when you will be thoroughly happy you followed my advice and began preparing for your sale from the very beginning of your entrepreneurial experience. Or you’ll be deeply sorry that you did not. I wish I had been better prepared for what the law firm representing CDW threw at me.
When I talk about tasks an entrepreneur likes and dislikes, organizing paperwork is one that does not rank high for me. As owner, I was always signing off on various documents ranging from bids, reseller agreements, distribution agreements, and personal guarantees to creditors—all of which are legal documents. Over the years I could probably recite the legalese in these documents with my eyes closed. They all seemed to be the same boilerplate document. They were formality tasks standing in the way of a sale, a much-needed product, or a credit release to expand our purchasing. I took little care in overseeing whether these documents were filed properly—if at all. As fate would have it, the CDW law firm zeroed in on all of these items as standard practice.
Since we found little use for these records over the past 10 years, they were scattered throughout the building depending on what individual at the time was responsible for them. The serious aspect of due diligence is that the information it reveals can trigger changes to the terms of the deal, delay closing, or kill the deal altogether. We managed to provide all of the necessary documents for this area of focus, but what a mess and embarrassment to have such shoddy records! Unfortunately, the next stage of due diligence was even trickier.
A primary intrinsic selling point of TRC was our proprietary web development featuring the display, fulfillment, and administration of software licensing. I had hired a development firm to custom build an e-commerce tool that reflected my vision and chosen architecture. Over the years, we refined and perfected the software’s functionality, based on our customers’ feedback. TRC was the only dealer in the country with such a powerful tool for deliverables. This tool was the intellectual property that CDW wanted to acquire and scale across all segments of the company. The company knew that acquiring our system would be faster and cheaper than trying to build one on its own.
During due diligence, we had to validate that TRC owned the development and more specifically the code for the system. Up popped an unanticipated potential deal killer: TRC didn’t own the code! I had confirmed with the developer, prior to this stage, that TRC did own the website and its functionality, but I hadn’t even considered whether or not TRC owned the underlying code. I was about to discover that our developer, as was common in the industry, always maintained ownership of the code it developed. If it turned over code ownership to each client, it would be limiting its ability to scale its own development efforts for new clients. For instance, the shopping car the developer creates for one client may look entirely different from the one it creates for another client, but the shopping carts’ underlying code may be very similar, if not identical. Giving clients ownership of underlying code would leave the developer constantly having to reinvent the wheel (or the cart, so to speak). Obviously, this would severely impact the developer’s ability to efficiently scale its own business.
CDW wanted our developer to sign an agreement stating that TRC owned the code and the developer would not replicate that code for any other client. The developer wouldn’t sign. My lawyers stepped in to work with the developer’s lawyers, and the situation grew even worse. In fact, the relationship between TRC and our developer was deteriorating, through the clash of lawyer egos. My developer was no longer returning my calls, and I was very concerned that without this piece, CDW would walk. And, at this point, I still hadn’t had any explanation as to why TRC did not own the code, and why it was such a big deal to the developer.
Fed up with everyone who had their hands in this mess, I removed my lawyer from the case and personally went to my developer’s office to get to the root of the problem, face to face. Bringing in our lawyers had just driven a wedge into the issue. I had developed a relationship with our developer over several years, and I used that long-standing relationship to bridge the gap. After I received a clear explanation of the developer’s concerns—and fully understood them—I explained to the developer how this impasse was detrimental to the success of the acquisition and asked how we could reach a mutual agreement between all parties. Logic prevailed, and the CDW lawyers drafted an intellectual property agreement that was acceptable to both the developer and CDW. We were back on track!
This story underscores a point I mentioned earlier. You, as the entrepreneur and founder of your business, must remain vigilant and engaged throughout the entire selling process. Our lawyer fees were starting to go through the roof on a developer agreement that should have been concluded after a series of emails. The more each side was pushed, the more entrenched each became in its position. Even though you have professionals handling the sale, you can’t turn over the wheel of the ship to them. They’re on board to help guide you through the difficult waters of the sale, but it’s your responsibility to bring the ship into port. If you let the pros take control of the sale, you’ll have a very difficult time taking back control if the deal goes off-course.
When the due diligence process begins, you may consider telling your employees that you are negotiating the sale of your business. New faces from the buyer’s office will likely be coming on site, and there will be a lot of unusual activity that may raise suspicion. You will need the help of your staff during this process, and the size of your firm will dictate the scope of your disclosure.
Be aware that once you disclose information about the sale to anyone on your staff, no matter how trusted, it’s only a matter of time before everyone in the company, as well as your clients, customers, and competitors, will hear the news. You don’t want the news circulating too early in the process because when your customers and vendors catch wind of it, they may have real concerns regarding the future owner. Certainly, employees will want to know if they will still have a job after a sale and who exactly is buying their company. When your competitors hear that you’re selling the business, they’ll know that you are either preparing to strengthen your market position or suffering from huge vulnerabilities. This is a daunting time for your position in the market.
When the information can no longer be contained, you can best maintain calm among the troops by making a well-thought-out announcement that clearly addresses as many concerns as possible and encourages your team to stay focused on its work. You may consider various extra incentives to reach goals that correspond to the closing date. Meet one-on-one if possible to hear concerns. Don’t seed concerns by guessing what employees may be concerned about. Chances are you’ll be very surprised at who is on board, who’s on the fence, and who’s checked out—and why.
Everyone at TRC was aware that the day would come when we would sell, and, according to my personal pledge, it would be for all the right reasons. Even with this preparation, I was not ready for the variety of responses from my workforce when word surfaced. The group who I thought would least support a buyout, the administrative operations group, became the most supportive. The sales team, the group I thought would be most energized, became the most disruptive and disgruntled. The acquisition was a tremendous career and earnings growth opportunity for everyone, but not all perceived it as such.
Members of the sales team felt threatened by the change and feared losing accounts they had managed for years. Our counterparts at CDW failed to fully disclose to our staff what their future would look like at CDW. Our team received only cryptic information about base pay, commission, and territory, and the lack of clear and immediate answers was not enough to entice some of them to stay on board. I lost my top three sales representatives, and productivity ground to a halt as rumors, fears, and misinformation filled the grapevine. To do it over again, I would have insisted on providing a clearer picture for my sales team and possibly allowed them to be part of the process. This can’t be done with a large organization, but at 30 employees, we likely could have incorporated their feedback for the benefit of all involved.
Finally, however, we emerged from the due diligence process successfully. We closed the deal with CDW in June 2006, and by the end of the year, we had closed the TRC offices and moved to CDW’s space. I agreed to stay on a minimum of two years after the closing to assist with the transition and knowledge transfer. It had been a long and emotional journey to get to this point, and now it was time for me and my family to celebrate.
Let’s flash forward to January 2009, two and a half years after the sale of my company to CDW, when I was laid off from my management role at the company. When I looked back on the many accomplishments we enjoyed at TRC, I felt a tremendous sense of pride and appreciation. Sadly, I hadn’t had the same sense of achievement over the past few years. Bureaucracy seemed to stifle the I.D.E.A. at CDW. The energy, enthusiasm, and passion I had when I first entered this building had slowly and systematically been replaced with conformity, procedure, and politics. This transformation frustrated me. I knew that my skills and talent were being sidelined, and that I could have done more to impact the company, even though it was my employer, rather than my entrepreneurial enterprise.
In reality, I was a square peg in a round hole at CDW, and my new position and reporting structure didn’t utilize my talents. The initial appeal of being the Business Development Manager at CDW waned. There was little vision for the position. I made some decent accomplishments during my term, but it was always a struggle. Instead of being supported by the full resources and capabilities of the company, I found I had to swim upstream, with my comanagers and operational “support departments” acting more like competitors than facilitators.
Why had I stayed on longer than my original agreement? Blame it on the Risk Box. Although I was increasingly unsatisfied with my work, I felt anchored to the material security of the job, with its high salary and luxurious benefits. I had allowed my entrepreneurial soul to wither. Now, I was probably the only happy one out of the 190 people caught up in this layoff. As I pulled out of the parking lot for the last time, I felt a new sense of freedom. The entrepreneur within me that had been dormant for so long began to show life, and I felt purpose flowing back into me. The mirage that the Risk Box was projecting started to dissolve, and I was excited.
I also felt that, overall, I had chosen the right directions in my entrepreneurial journey. If I had waited just a period of months to take TRC to market, I would have missed the opportunity with CDW. And, just two years after the sale, the economic disaster of 2008 had brought merger and acquisition activity to a grinding halt. TRC would have been forced to face this economic storm by cash flow alone—and I’m not sure we would have made it through. People ask if I regret selling TRC, my first entrepreneurial dream. Not at all, I tell them—it was all in the plan.
I spent a good part of my time after leaving CDW to research and write this book. And it was during that process that I came to understand that entrepreneurism is a journey. Before you close this book and move on with your own life, I’d like for you to take one last moment to think about that journey with me, this time, as a voyage in which your entrepreneurial business is a ship. The market demand for your product or service is the wind that pushes the company forward, and your company’s infrastructure, culture, and policies form the sail. You can’t control the wind of market forces, but you can adjust your sail—your website, employee training, staffing, location, and so on—to gain the most momentum from it.
On this voyage, your business plan is your navigational map; it directs your progress, from lead generation all the way through product fulfillment. Your strategy is the ship’s rudder, which keeps you pointing always in the right direction, and your management approach is the keel that keeps the ship from capsizing. You, the captain, make decisions, set a course, and establish your temporary anchor points and final destinations. You can never take your hands off the wheel or your eyes off the horizon as you command your vessel. Your well-chosen and highly trained crew takes care of the tasks that keep the ship moving, but it’s your responsibility to keep it on course and sailing forward.
Pulling into the harbor at the conclusion of its voyage is the most dangerous time for any ship. You have to pay attention to every detail and scrutinize each decision you make during this delicate process. Positioning the ship properly will require all of your skills and abilities. But no captain and few ships stop after a single voyage. After you have successfully brought your first entrepreneurial experience to a close, you can expect to set sail again. You may be piloting a new ship, and your old ship may have a new captain at its helm. That doesn’t matter; the old journey is over. It’s time to get on with the next one.
Yes, I know that was a rather lengthy analogy, but I’ve put it here for a purpose. I want you to see the work that you do as an entrepreneur as a great and meaningful passage, from the moment you begin formulating your entrepreneurial idea and testing it in your E-Formula, through the hard work of launching your startup, running a successful business, and then negotiating the final sale or transfer of the company. You are in charge of transforming your idea into a reality—and, in the process, creating a thriving, successful generator of products, services, employment, and economic vitality. And yes, the journey will be scary at times; you’ll hit snags, lose momentum, veer off-course, and have to get your bearings and find your way back. But, for an entrepreneur, the journey is everything. Missed opportunities, minor catastrophes, and full-blown disasters are just part of the experience, as will be the fascinating colleagues, achievements, successes, and discoveries you’ll gather along the way.
I hope that this book has helped you realize that whatever fears you must face on the road—or the rough seas—ahead, they’re not nearly as threatening to your entrepreneurial spirit as the thick, padded walls of your Risk Box. In my experience, an entrepreneur’s regrets after a business failure are much less bitter than the regret of never having tried to satisfy entrepreneurial desires.
I hope this book will help give you the advice and guidance you need to take that first step toward activating the entrepreneur within you. And I hope that it will offer you the same kind of ongoing encouragement and inspiration that I received from that tattered calendar page and its constant reminder that “If you do what you’ve always done, you’ll get what you’ve always gotten.” I’ll leave you here with my own bit of simple wisdom:
Dreams come true by doing, not by wishing.
Enjoy your journey.
