This post is a continuation of my earlier article, 15 Things I Learned When I Sold My Business. In it, I recap insights I shared in a 2006 presentation to McMurry staff after selling my firm, Redspring Communications. Part One focused on building a business and readying it for sale. Here I continue the discussion by looking at how we at Redspring identified qualified buyers and navigated the first phases of acquisition and integration.
6: When looking for a buyer, hope isn’t a strategy
When contemplating the sale of Redspring, I received advice from many people. Some told me not to get hung up on the buyer’s plans for the company after I sold. “Just maximize your valuation,” they said. “You can’t control what happens after the deal is consummated.” That didn’t sit right with me. I couldn’t live with the idea that the people who helped build my company might end up working for an unscrupulous firm or, worse, get laid off to enhance EBITDA. So when I began my search for a buyer, I developed two prospect lists and one rule.
The first list comprised about 100 qualified potential buyers. The second list included 10 optimal buyers we felt might be good fits for Redspring’s particular culture. Those were our top prospects.
The one rule I lived by was this: If I couldn’t get comfortable with the buyer’s plans for the company after the acquisition, I wouldn’t sell. After all, I was selling not just to realize value from my 15 years of hard work and investment—I also believed the company could better realize its ambitions as part of a larger organization. That simple rule guided my selection process and resulted in our combining with McMurry, with whom our core values aligned remarkably well. A big part of our discussions with McMurry involved understanding their plans for integrating and growing Redspring after the ink dried.
Finding a suitable buyer didn’t happen by accident; it was by carefully planning and setting priorities along the way—and being willing to walk away from a deal if necessary.
7: Remember the “C” word
Culture will matter enormously after a deal is consummated. In fact, according to a KPMG study, “83% of all mergers and acquisitions (M&As) failed to produce any benefit for the shareholders and over half actually destroyed value.” The overwhelming cause for these failures “is the people and the cultural differences.” For this reason, the buyer and seller overlook cultural differences between their firms at their own great peril.
On top of the financial and operational exigencies associated with cultural alignment, I also didn’t want to subject my staff to a crappy post-deal work environment. Moreover, having promoted a set of core values to my team for 15 years, I wasn’t going to be hypocritical by abandoning those core values when they became financially inconvenient.
I felt we did a good job of nurturing a strong and inclusive culture at Redspring. So naturally when I was looking for potential buyers, I wanted to find a company with a similarly pronounced company culture that honored the same principles as we did. Having hired two ex-McMurry employees, I already knew a great deal about the company’s culture—more than most sellers tend to know about potential buyers. Those employees spoke highly of McMurry and confirmed that its culture was similar to Redspring’s. That knowledge helped guide my priority-setting during the sale process—and placed McMurry higher on the list than other buyers.
Arguably, culture isn’t as critical in businesses less reliant on human capital; but in a creative business like Redspring where so much depends on individual creativity and relationships, you can’t risk alienating the employees whose talents are your company lifeblood. Keep them happy and comfortable and you’ll keep your revenue growing. A lack of cultural alignment will almost certainly torpedo your pro forma spreadsheets and leave your meticulously planned acquisition a burning wreck.
“Jim,” he said to me, “there’s only one question you have to answer at this point: Do you trust these people?”
Lesson 8: Verify. But trust
At one point during my due diligence, we got hung up on a couple of deal points. My natural tendency is to be distrustful and suspicious, so I got a little hot under the collar and vented to my attorney about it. He was a big, brash Irishman who negotiates like a pit bull but also believes in the power of human relationships. “Jim,” he said to me, “there’s only one question you have to answer at this point: Do you trust these people?”
Bemused, I explained this wasn’t about trust—it was about having a solid contract and making sure that nothing was left to guesswork. When I finished spouting off, he said, “Yes, but even with all that due diligence, if you don’t trust these guys it’s not worth moving forward. If you do trust them, then you’ve got to identify the point at which the legal documents give way to a fundamental level of trust.”
That was an epiphany for me. He had just turned the Cold War axiom of “trust but verify” upside down. I thought deeply about whether I fundamentally trusted Chris McMurry. He had done everything he said he would do. He had been consistently honest and straightforward. He’d been tough but pleasant to deal with. So I decided to trust him. That didn’t mean I was less scrupulous in hammering out deal points, but I did so with the underlying belief he was acting in good faith. Chris, in turn, detected my own good faith—and all this made for a remarkably smooth process. When we hit snags in our negotiations—as inevitably happens when millions of dollars are at stake—we found compromises more readily in the absence of suspicion.
The broader lesson here: Focus on building business relationships that are founded on mutual trust—then buttress them with quality legal documentation. Contracts are great, but even better is doing business with ethical people.
Staff suddenly had 100 coworkers in Phoenix, a new brand, new set of core values, and new capabilities. That’s a lot for people to digest, and we could have prepared them better.
Lesson 9: Everything will change
The M&A consultant who advised me on the Redspring sale had done many deals during his 20-year stint at Hearst. Sensing my reluctance to see Redspring’s culture dismantled, he reminded me that, after the purchase agreement was executed, everything would change. He’d seen enough in his career to know this would be the case.
Even with this information, I worked hard to ensure as much continuity for my team as possible. During negotiations, Chris and I understood that disruption to our operations could scare away valuable staff and hurt revenue. So we agreed that Redspring would operate as a separate business unit with its own P & L. The org chart would remain as is and our offices would remain the same for the foreseeable future. With these agreements in place, we were emboldened to reassure nervous staff that the day after the acquisition would feel just like the day before. While I believe we were right to give these assurances, we should have invested more time in anticipating and communicating what would change.
While employees’ job responsibilities and work environment did stay largely the same, their whole sense of identity as employees of a small Saratoga Springs-based content marketer changed completely. We went from being a scrappy little start-up to a much larger organization with a different brand and wider reach. Staff suddenly had 100 coworkers in Phoenix, a new brand, new set of core values, and new capabilities. That’s a lot for people to digest, and we could have prepared them better.
When selling a company and anticipating integration, leadership needs to address the following:
- How do we best understand and manage employee expectations about the deal?
- How exactly will employees experience change?
- How can we best inform them about changes beforehand?
- Once integration is underway, how do we best communicate about change in real-time?
- Is the integration plan flexible enough to adjust the pace or extent of change as we go?
- When can employees expect any integration-related change to wind down?
10: The more things change, the more one thing stays the same
Despite all this acknowledgment of change, you can rely on one abiding truth: Your business is only as good as your people. This goes back to my point about hiring people you trust. It’s never more true than during an acquisition when it’s the people you’ve hired who deliver on the company’s promise for the future. Transitions like an acquisition are hard enough with good people on board. Bad people make them a potential disaster, and that’s not a risk worth taking.
During integration, you’ll need to task your managers and their teams with delivering on acquisition-related goals. Recalcitrant or resentful managers are unlikely to inspire their teams to great achievement—and they will probably cause real harm. Just as hiring good people was important when you built your business, trusting those same people to deliver on integration goals will be critical to the success of the venture. As a leader, you must set an enthusiastic example for your team to follow: Show them you embrace the new reality and help them do the same. Don’t under-estimate the impact of your own behavior during this sensitive period.
Look for Part Three of this presentation in a post very soon.