Inc.: Is there a tip-off?
Rickertsen: If you're not talking real turkey after three meetings, give up. You have to give them that long for a couple of reasons. First, you almost never talk money right away, and second, for founders, the company is their baby. It's their whole life. It is never easy for them to sell, even if you offer them a screamingly high price. So you're never going to get very far until the third meeting. But if after the third meeting they're not ready to show you their financials, you only have a tire kicker.
Inc.: OK, suppose he's a serious seller, and he learns that the management team -- his management team -- is the potential buyer. How does everyone deal with the inherent conflicts, especially about valuation and about how the company will be run during the negotiations?
Rickertsen: Let's take the owner's position first. There are a lot of potential problems. Not only does he probably want the highest price while the buyers want to pay the lowest, but the buyers -- his managers -- are in a position to truly hurt the company. They can harm the business if they don't stay. They can sabotage relationships. There have been situations where the manager-buyers intentionally didn't perform as well, in order to get the price down. So you as the manager have an obligation to your employer to behave well.
I think the two best ways to mitigate those conflicts are: Number one, just put them on the table. Talk about them. The second way is for the seller to bring in a professional to make sure the sale is managed fairly. Part of that means finding out if there are other potential buyers. The owner may have no intention of selling to anyone else, but it keeps the management team honest and on track. If the managers are the only potential buyers, and if they turn out to be bad actors, they may hold an owner hostage. They can threaten -- directly or otherwise -- to do all kinds of damage if their price isn't met.
That's why as a founder you hire someone to run the process for you, and you start talking to other potential buyers even if your goal is to sell to management. The move puts the management team on notice that if they get too far off the reservation, the company is going to get sold to some other strategic party and they may lose their jobs.
If you are negotiating one-on-one as the owner, the risks are too great. There's the price conflict, the employee-performance conflict, and the employee risk in general. Your risks as a founder are too great, because you're turning too much leverage over to your employees. That's why I'm a big advocate of having a real process.
Inc.: I understand the idea of bringing in other potential bidders, but how receptive are owners to turning over control of the process to someone else, especially when it comes to valuation?
Rickertsen: Not very. Some 90% of the owners in this country begin with the position "My company is the best company in the world. And despite what the comparables show, my company should sell at twice the industry norm." Entrepreneurs who live in that world -- and stay in that world -- don't ever get their companies sold. I understand their position. They built the company from scratch. It's their baby, and no parents have ever thought they had an average baby, let alone an ugly one.
If you're negotiating one-on-one as the owner, the risks are too great.
Still, the entrepreneur needs some level of objectivity, and that's where the professional comes in. If you ever do want to get your company sold, you need to acknowledge that there is a market determining what companies trade for. If you don't, then you can't complain that you can't sell your company.
Inc.: What do I do as a manager-buyer if it looks as if the owner may actually sell to another company?
Rickertsen: If it's all about price, strategic buyers always win, period. They can always take out costs from a seller's income statement, which means they can show more profit, which means they can pay a higher price. In that situation, the management team is always going to lose.
Inc.: I've got no shot?
Rickertsen: You should compete with the outside buyer. You should sell the owner on what you can do for the company and what continuity will do for the company and for the employees. You should be as aggressive on price as you can. But at the end of the day, if a strategic buyer wants it, you're just not going to own it.
Inc.: Do owners want to sell to management?
Rickertsen: A lot of them are inclined to do it to preserve their legacy. They like the idea that the company will continue as is. It can be a very satisfying way to exit.
Inc.: How often do owners give the management team a break on price? Even if they want to, don't they always have family members and advisers telling them to go for the highest possible payoff?
Rickertsen: Obviously, it's the owner's call. The owner has lived with those people [the management team], and the advisers haven't. If the owner wants to do a deal at the low end of the market to sell the company to the employees, then that's a great thing for the employees. But again, the owner needs to know what the company is worth. As an owner, you hire a professional who comes in, runs the comparables, and says, "Companies like yours trade at 1.5 to 2 times revenue. And that makes your business worth between $7.5 million and $10 million." If you wanted to sell the company to your employees for $7.5 million, that would be supportable, and it would be good for the employees.
