With A Little Help From Your Friends
If you've started a company and haven't yet sold it, rest assured, your day will come. As sure as there are catfish in Georgia, you'll get an offer. And when you do, take my word, you'll need some special help. I know; I've been there many times. After completing the sale of a subsidiary a few months ago, the lead lawyer for the other side asked me, "How many of these sessions have you been in?" I counted and found to my amazement that over the past three decades I have been involved in more than 60 acquisitions, mergers, or sellouts. That may or may not qualify me as a specialist, but in any case, I'd like to pass along to you some thoughts for which I have paid dearly over the years.
When your day comes, there is one question to get out of the way before you meet with anyone. Ask yourself, "What am I willing to sell?" If the answer is company assets, that's one thing. But if you are selling yourself, which is usually the case, then you have some homework to do. And I literally mean homework. At my first opportunity to sell out, I came within a gnat's hair of making a really stupid mistake.
It was in the late '60s, when stocks were selling at incredibly high multiples. Out of the blue, I was contacted by the people at Booz, Allen & Hamilton Inc., the management consulting firm, who told me they had a client who wanted to purchase my company for 40 times aftertax profits. That would have meant 20 million bucks to me personally. I couldn't believe my ears. I went rushing home, all excited, and told my wife, "We're rich, we're rich. Just think, we can buy tax-free municipals and have a lifetime income of over a million dollars a year." My wife, who is British and about as flappable as Churchill, said, "Well, I suppose that makes you very happy, old boy, but tell me, where will we live?" I thought for a moment and told her that we would probably live in Philadelphia, since that's where the acquiring company was located. "Do you really want to live in Philadelphia?" she asked, which caused me a moment of hesitation.
"Well, not really," I replied.
She was quiet for a minute and then asked me the kind of profound question that only wives think of: "Tell me, Wilson, what will we have then that we don't have now?"
I looked out our window at our yacht, parked at our dock on the beautiful Saugatuck River in Westport, Conn., and sheepishly answered, "Well, I can't think of anything right now, but what about all of that security?"
My wife nodded, smiled, and handed me a bomb: "To whom will you report?"
I took a deep breath, slowly exhaled, and said, "I didn't ask." Absolute silence. "But think of all that money, $20 million."
"I am," she said. "I am also thinking about how hard you have worked to reach this point where we do pretty well what we want to do, when we want to do it. I am also thinking of me and our four children and all the difficulties we are going to have trying to live with you working for someone else, living where you don't want to live, working with people you don't even know."
I bowed my head and raised my hands in surrender. The next day I went back to my office and informed Booz, Allen that I was not interested in continuing the sellout conversation. They thought I was nuts and said so. My bankers agreed, as did my accountants and my lawyer. But I have never regretted the decision I made that day.
Of course, some owners may not have the luxury of saying no. There comes a time in the life of most companies when the owner must face the reality that the company won't continue growing unless he either sells out, goes public, or takes another mortgage on the old homestead. So let's assume that you have decided that you should sell everything, including yourself. You have some important considerations to make before you start the negotiations.
First, who will negotiate? I suggest you eliminate any thought of letting your lawyer negotiate for you. Chances are he has never owned a business or sold one. Nor should you turn the job over to investment bankers. In order to make commissions, they will sell you out for anything, including Confederate money, which may turn out to be better than some of the junk paper they will try to palm off on you -- at least there's a chance the South will rise again.
A number of business-broker organizations specialize in evaluating and then negotiating the sale and mergers of companies for various fees and commissions. The competent ones can be helpful in restructuring your financial statement and determining values, but I would not let them handle the actual negotiations. I don't believe that they care a hoot about the person they are selling along with the business or about what happens to him right after the sale or merger.
So, if we eliminate lawyers, investment bankers, and professional business brokers, who is left? You? No way. Remember, you are selling yourself, which means that you are too close to be objective. The chances are you'll blow the whole deal over some insignificant detail. Let me suggest an alternative: find another company owner and ask him to handle the face-to-face negotiations for you. You can still call the shots, but you can do it better from the next room. I've tried this, and it works beautifully.
The first time I used this technique, I was not selling myself or the whole company, only the name, sales, and distribution of a single product, but the sale was to a major corporation. I knew with absolute certainty that if I were a principal in the meetings, I would probably blow my cool and the deal right along with it. Entrepreneurs weren't very popular at large companies in those days. Admitting that you were one was about the same as confessing that you were a piano player in a house of ill repute. So, rather than take a chance with my ego and their attitude, I called an old friend and fellow chief executive officer and asked him if he would handle the negotiations for me. It took a lot of persuading, but he finally agreed. I knew he could, and would, be objective, and I had been around him enough to know that he was smart as hell and that nobody was going to outnegotiate him. During all of the negotiating sessions, I was in the next room, wiping off sweat and praying. My friend would come in once in a while and hold my hand while he briefed me on what was going on. Occasionally, he even asked my opinion. And he worked out a fantastic deal. In later years, when I was in the business of acquiring companies, I employed a full-time negotiating team, but I wasn't on it -- I was still in the next room.
Regardless of whom you select to handle things for you, your negotiator should try to settle all the important points directly with the opposing principal. The whole process will run much more smoothly if you aree to tell the lawyers from both sides to keep out of the negotiations. Inform them in no uncertain terms -- it may help to curse a little -- that their sole responsibility is to reduce to legal terminology the agreement you reach. When they give you the first draft, just glance at it and hand it back, saying something like, "You lawyers were told not to try and negotiate this deal, so take these papers back and do what you were told." You just may get back the second draft bearing some resemblance to your agreement.
All merger and acquisition negotiations have a certain life of their own, but there are some statements and promises that will always be made by the acquiring company -- for example, "We want you to continue running your company just the way you have in the past." That's a bunch of hooey, and don't believe a word of it. Ask them if you'll continue being CEO. The answer will be no. If you're lucky, your new title will be chief operating officer of your division, which means that you will report to someone, somewhere. If you are selling out to a large company, the chances are that you will be reporting to someone, who reports to someone, who reports to someone. When you meet him -- if they let you -- don't be surprised if he looks like your son or grandson and knows absolutely zero about your business. You may have no choice but to accept him as your boss, but at least you should know just how much fun you're going to have in your new life.
You can also expect to be told, "We won't require you to make any important personnel changes." More hooey. Within 90 days you are going to have a financial person assigned to you, and he or she will disapprove of almost everything you want to do. Again, there may be nothing you can do about it.
Finally, there's your employment contract. The buyer's principal concern will be the noncompete clause, which says that for a specified period you can't leave the company and restart the same kind of business. That's fair, but you'd be wise to make the period as short as possible. If things go well, it's not an important point. If things go sour, you'll kick yourself for not having negotiated a little bit harder. Another thing to insist on is that the employment agreement spell out as many details as possible -- vacations, automobile, insurance, country-club dues, and all those other little things that you have been writing off all these years.
Above all, be sure your specific duties are outlined and a clause added ensuring that you will never be asked to perform any duties that are inconsistent with your present position, like being a janitor or, worse, administrative assistant to grandson. Nail down specifics about the buyer's ability to transfer you to another location, like Nome, Alaska, or Beirut, Lebanon. If you have been offered a bonus program, insist that the buyer put all the details in writing. As to the length of your employment contract, make it as long as possible. Remember, they can't force you to work, so if you want to leave you have an edge; but you don't want to give them the option of picking the time. Also, be very careful about the conditions under which your contract can be terminated. Look out for vague expressions, such as "so long as you are effective" or "by action of the CEO or board of directors." Insist on their spelling out valid reasons. It's OK to have words like "gross misconduct" (wait until they try to prove that one) or "deliberate and continued refusal to follow the directions of the CEO." Of course, you should be willing to agree not to steal, ride a motorcycle in the office, or murder grandson. But be careful: words can come back to haunt you.
As I said, these kinds of negotiations have a life of their own. The buyer is acquiring a company, a thing. But to you and your family, it's your lives that are being sold. Take your time, and remember: if you don't protect yourself, nobody else will.
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