Selling a business is one of the most sophisticated transactions an individual can be involved in as a party. It is a transaction that traditionally involves making difficult decisions that require legal, accounting, business, and real estate knowledge. It can also be a transaction that involves making decisions that place the business owner in a moral dilemma where mutually exclusive goals and objectives need to be evaluated and a decision made that results in a desired goal being forgone. The moral dilemmas experienced in business brokerage often force an entrepreneur to weigh financial goals versus intangible goals.
The following are descriptions of two common moral dilemmas in business sales that clients of IBA were forced to confront in the 4th quarter of 2015:
In a transaction involving the merger of two companies, it is common for one of the brands to be eliminated to gain financially synergistic benefits for marketing & administration. An example of this from Wall Street would be the 2010 merger of United Airlines & Continental Airlines where today the Continental Airlines brand no longer exists in the public domain. These benefits can also be achieved when two privately held companies merge. Larger companies buying smaller companies is a common type of transaction facilitated by IBA with companies growing by acquisition often being attractive buyers for our sell side clients for a variety of reasons. However, this type of sale can also confront an entrepreneur with the difficult question, do they care whether the name and brand they developed continue into the future. Many IBA clients prioritize financial objectives and decide not to make continuation of the market identity of a business a priority in negotiations, but that is not always the case.
This autumn one of IBA’s clients selling to achieve retirement goals had multiple offers from qualified buyers on the table. The decision regarding which party to sell to was difficult as a compelling case could be made for each potential buyer. All-expense paid trips were offered by buyers to their out of state corporate headquarters in an attempt to influence the decision process. Financial packages were proposed above the asking price by companies that wished to acquire the systems & market share of the business. However, one party positioned themselves in negotiations as valuing the company’s brand and desiring to keep the founder on staff in a capacity desired by the entrepreneur during a transition to retirement. Ultimately, our client reached agreement for the purchase & sale of the company at financial terms lower than were proposed by another party desiring to merge the company into its operations in a manner that would have eliminated the brand from the marketplace over a short time period.
This situation is informative because it demonstrates that economic components, while important, may not ultimately determine the winner in a negotiation. A skilled negotiator will be cognizant of all elements motivating the parties and how those elements impact the decision process. In this situation, the party that put together the best combination package of financial & intangible elements ultimately achieved their goals in the negotiation. I stress frequently at IBA to our team of negotiating professionals that we are not selling or buying the company we are representing, we are hired to facilitate a process that achieves an outcome that is satisfactory to the parties actually participating in the transaction. It is our job to move the process forward employing “best practices” and providing appropriate information, so the parties can make business decisions from positions of knowledge. These objectives were achieved successfully in the transaction described.
Another common moral dilemma faced by our clients is what to do when a long term employee expresses a desire to purchase the business from the inside. This inquiry forces the business owner to assess if the party has the resources to purchase the business and the skill set necessary to run the business. A willing & able buyer without the resources to buy a business at a “fair market” value forces a difficult conversation between owner & employee without an easily identified positive outcome. A long term working relationship can color the assessment of the skill set of an employee positively or negatively based on a desire to see a “favorite son” achieve a desired goal or fill an individual with doubt based on memories of how prior leadership situations were handled to the detriment of the company. A decision also needs to be made regarding on when to respond to the inquiry. If a business owner has decided to employ professional representation to sell their company on the business opportunity market an internal buyer can be approached before marketing of the business commences or after an acceptable offer has been produced. The advantage of approaching the internal buyer prior to bringing the business on the market is that the potential exists for a seamless transition of ownership with a limited period of uncertainty regarding the succession plan. The disadvantage of approaching an internal buyer prior to bringing a business on the market is that if negotiations do not end with a positive result it is difficult to maintain confidentiality about the business owner’s succession plan goals. Public knowledge a business is for sale can negatively impact corporate culture, customer & supplier relationships, and the value achieved for the business in a future sale. Approaching an internal buyer after an outside buyer has been identified to see if they would like to complete an acquisition can result in a need for the inside buyer to ramp up acquisition activity in a truncated time frame potentially creating a stressful negotiating environment and/or put the employee in a position where their acquisition goals may run counter to the business owner achieving their best possible transaction outcome.
I am currently involved in facilitating a transaction that has incorporated a spectrum of the issues described above related to an employee wishing to purchase a privately owned company from the current shareholders. In this situation, the employee was provided an opportunity for multiple months to purchase the company prior to it being brought on the market with IBA. Unfortunately, the parties were not able to come together. The business was then listed for sale with IBA and multiple offers generated to buy the company, including two above the asking price. All buyers presenting offers negotiated in “good faith” and were viewed favorably by the seller. Recognizing, the valued employee’s desire to purchase the business the potential internal buyer was provided another opportunity to purchase the business at a “fair market” value prior to negotiations being finalized with any of the external parties. Ample time was provided for the internal buyer to seek acquisition financing and negotiate in “good faith”. Patience was requested from the external buyers and transparency provided regarding the status of activities. Ultimately, the internal buyer determined an acquisition of the company at a “fair market” value as not possible and the party bowed out as a participant in the negotiations to buy the company. This “honest & transparent” process resulted in an environment where the new owner will have an opportunity to retain the quality, valued employee after a transaction is completed and the employee was conveyed appreciation on multiple levels for years of service to the company.
This situation is educational to business buyers, sellers, and mergers & acquisition intermediaries because it demonstrates the complexity that can exist when incorporating employees into a business sale negotiation process and the value of an experienced, knowledgeable business broker willing to create an environment of full disclosure where all parties interests, abilities, & objectives are allowed to be developed, presented and assessed without emotion coloring the process.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.