Alexander Watzke couldn’t believe what a botch the acquirer of his company had made of its new property.
The deal had held such great promise. Watzke’s online retailing startup was already No. 1 in a niche with explosive growth potential. And the U.S.-based acquirer had promised to employ its deep pockets and e-commerce expertise to vault Watzke’s business into the e-tailing big leagues.
Instead, Watzke (not his real name) was shocked and angered when the acquirer failed to keep its word. Watzke was supposed to be able to draw on some big-brained talent during the six-month transition he was staying on for, but it never materialized. “They had people with PhDs in graphical user interfaces,” says Watzke, “but they had too many demands on their time, so we never saw them.”
He was initially pleased to see the new owner increase his former firm’s marketing budget by 10 times — then dumbfounded when the acquirer spent the money so foolishly, it yielded no more new clients than previous campaigns had.
Before the sale, Watzke was free to make changes to his firm’s website in hours or even minutes — a critical ability in a sector in which only the lightning quick can stay ahead. Now, he faced a chain of command that took a week to okay minor changes. Watzke watched in dismay as rivals capitalized on this sluggishness to overtake the business to which he’d given birth. The high energy he used to enjoy as his own boss ebbed away. In its place, Watzke felt a growing apathy as the new owners neglected their acquisition and ignored his ideas for the business. “If they wouldn’t listen, what could I do?” he says.
Watzke’s former firm, which was profitable when it was acquired just eight months after launching, started losing money. What was now a small division of an e-commerce giant slipped from first to fourth place in its sector as its growth rate tailed off. “We thought one plus one would equal three, but it came back at 0.8,” says Watzke. Even worse, the acquirer had fumbled a string of other acquisitions and was headed toward bankruptcy.
Thankfully, most sales of companies don’t lead to such a bleak outcome. Yet the risk that you’ll have substantial regrets after selling your business — even if, on balance, you believe you were right to sell — is greater than you might think.
No hard data exists on how many sellers experience a considerable degree of seller’s remorse. Yet it was easy to find such sellers for this story, although most agreed to interviews only on the condition that their identities be disguised. And professional advisers to entrepreneurs who sell their companies say that, while most of their clients are generally happy with how things turn out, a sizable minority have significant regrets.
Not that the remorseful shout it from the rooftops. Kelly Willis, a partner at Toronto-based Newport Partners, a financial advisory firm for entrepreneurs, says when Newport interviewed more than 100 Canadian entrepreneurs who had sold their firms, “they were surprised to learn they weren’t alone in having regrets. It’s this thing no one talks about.”
This is understandable. Most people outside the business world can’t imagine why you’d have any complaints after hitting the jackpot. And sellers are loath to sound like whiners by mouthing off about mismanagement by the new owner.
The silence might lead you to underestimate the risk of a rude surprise when the time comes, as it likely will, to sell your own business. Brace yourself for how tough it can be to fill the void that this will leave in your life: fully 53% of the sellers Newport interviewed discovered they were more attached to their former company than they had realized. “It’s absolutely common for entrepreneurs to fall in love with their business,” says Newport partner Peter Churchill-Smith. “In many respects, this is what makes the post-sale experience so difficult, because you’re out of the game.”
You should also prepare for the chance of a less common but far more painful regret: that you entrusted your baby to someone who made a mess of it. An acquirer who had seemed to share your vision during the sale negotiations might end up appalling you with her misguided strategies, disregard for key clients and employees, or destruction of the innovation or customer service that made your firm worth buying in the first place.
The word “regret” doesn’t do justice to the intense emotions you’ll feel if this happens to you. Many business owners say that selling your company is as wrenching as giving up one of your kids. And it can break your heart to see your child adopted by someone who turns out to be a bad parent — especially if you’re retained on a post-sale management contract and forced to witness this first-hand.
There’s no foolproof way to prevent such a dire outcome. Still, there are steps you can take to reduce the risk. (See “The Dreaded Transition” on page 35 and “A No-Regrets Deal” on page 36.) And the following stories about those who have suffered major regrets offer insights into where things can go astray — and what it takes to move on.
“Selling my business was the best and worst thing”
Like Sean Neville, you might have regrets about the fate of your company even if the new owner doesn’t mismanage it. When the perfect deal to sell his company slipped out of his grasp, Neville, the founder and former CEO of Simply Audiobooks, had a tough call to make. Should he hold out for another perfect deal, even though none was in sight? Or should he accept one that would leave his firm in capable hands but no longer dreaming big?
Neville had built Simply Audiobooks into the world leader in online audiobook rentals. But by 2008 the Oakville, Ont.-based firm had scaled back its ambitions to focus on profitability over growth. Neville was itching to resume go-go growth by spending on a new round of industry innovations and geographical expansion — paid for by selling the business to a large player. Early last year, he spent five months negotiating with a U.S.-based buyer that shared Neville’s vision and had 15 times his firm’s revenue. But Neville was blindsided when the acquirer’s parent company defaulted on a debt covenant, killing the deal two weeks before its slated close.
Three months later, a much smaller suitor came calling: a Burlington, Ont.-based numbered company in which Simply Audiobooks co-founder Sanjay Singhal is a minority partner. Neville says this company wanted to forgo any plans to return his firm to fast growth and instead planned to “run it as a cash cow.”
Neville knew his business had been well shopped around and another buyer was unlikely to surface amid the slump. He could have offered to buy out Sanjay — each owned about 28% of the firm — but admits, “I didn’t want to take on even more risk.” Neville and the new bidder soon signed a deal, but Neville found it such an anticlimax “I didn’t feel like going for the beer I had planned to have with Sanjay. I just wanted to deposit my cheque and go home.”
Neville is wistful when he ponders what he could have achieved if he’d stayed on. Most days, he thinks he made the right decision, yet he admits to highly mixed feelings: “Selling my business was the best and worst thing that happened to me in 2009.”
In part, that’s because of a regret that’s easily recognized by others who’ve settled for a less than ideal exit. “The dream didn’t end the way I had envisioned — being acquired by a much larger company, to great fanfare,” says Neville. “We reached a nice, clean, small deal, and I’m still quite amicable with Sanjay. But there was no tickertape parade.
“She was quite reasonable — before the sale”
The woman offering to buy the business of RenÃ© and ThÃ©rÃ¨se Ouellet (not their real names) was full of praise for their chain of eight womenswear outlets. The prospective buyer said the only changes she’d make would be to repaint the stores and switch from plastic to wooden hangers. She even signed a letter to staff promising to leave things virtually the same.
Imagine the Ouellets’ surprise when the buyer initiated sweeping changes soon after closing the deal. The chain’s customer base had aged over the 25 years the Ouellets had run it, and the new boss was unsettled to learn that her fashion-forward 30-something friends no longer shopped there. The former owners, who had been retained on management contracts, agreed it made sense to reach out to younger, more upscale consumers. But they warned that competition was far stiffer in this segment and it would be easy to alienate existing customers.
ThÃ©rÃ¨se says this is when she and RenÃ© realized the new owner was “completely, absolutely arrogant.” The acquirer raced off in hot pursuit of her new target customers rather than wait until she was up to speed on a business she knew little about. Within six months, she had greatly altered the product mix and spent big to replace every mannequin and launch a new logo. “Why spend all that money to get rid of a recognized logo established for 25 years?” says RenÃ©. The acquirer went through a series of head buyers, a crucial job in which turnover is usually low. RenÃ© says this led to erratic clothing selection, and the recession hit sales far more than at the chain’s rivals, forcing the acquirer to close two stores.
RenÃ© says the post-sale management contract was a time of “shock, anger, disbelief and daily frustration.” He and his wife “felt sad for the employees as we saw them become frustrated by the new owner not seeing their point of view on anything. It was her way or the highway.”
The buyer’s relationship with the Ouellets quickly hit the rocks. “She felt threatened that staff were coming to me, not her,” says ThÃ©rÃ¨se. “So, she put me in a back office and told me I wasn’t allowed to talk to the staff.” Two months into ThÃ©rÃ¨se’s three-month contract, the acquirer fired her. RenÃ© was so offended that he renegotiated his own six-month contract. He accepted less money so he could leave immediately, although he remained available by BlackBerry to answer the acquirer’s questions.
RenÃ© says the deep unease he and his wife had felt is totally gone. “Almost all the staff we were close to have been fired or quit, and have found jobs they like,” he says. “So, even the little bit of guilt and sorrow at my former employees’ predicament faded as each one left the company.”
“I was seeing things happen to my baby that I didn’t like”
Marie Robbins was anything but naive when it came to selling a business, having completed a dozen successful acquisitions herself and having lined up experienced advisers in her corner. The couple to whom she sold Hamilton, Ont.-based F.B. Smith/McKay Florists Ltd. seemed like a perfect fit: they had seven years of retail experience as greengrocers, and buyer and seller were mutual customers. Since Robbins’ 1975 purchase of the floral retailing and design business, she had turned this local institution into an industry leader in inventory management, staff training and customer service. In 2006, the year she sold the firm, it celebrated 100 years in business.
But during Robbins’ six-month post-sale management contract, she was perplexed by how the husband-and-wife team ran the business. They decided to devote 90% of the shelf space to fruit and vegetables, displacing higher-margin flowers. Against her best advice, they jumped into a new computer inventory system, installing one with big gaps in data crucial for customer service. Robbins repeatedly offered to introduce the couple to people at local business-networking events who were key to landing big accounts, but the new owners said they were too busy. They lost their biggest contract, too — a blow that Robbins attributes to slow response to customer complaints.
Robbins says she went above and beyond to help the acquirers and protect her own reputation, and was frustrated and annoyed when they largely ignored her advice. As the business went into steep decline, she felt the kind of stress a mother would feel to watch her child suffer. “It was my baby for all those years,” says Robbins. “I saw it grow, I saw it develop and I was seeing things happen that I didn’t like.”
She became even more stressed when neighbours and former clients would lament that her old firm was on the skids. “I’d be in the grocery store and a customer would come up to me and ask, What’s happening over there?'” says Robbins. “It became harder and harder to stand behind the decisions that were being made.”
A year after F.B. Smith/McKay had marked its centennial, the bankruptcy bailiff was at its door. Robbins says this was the end of an emotional roller-coaster ride for her, from the excitement of selling her firm to buyers who had seemed so promising to “the huge disappointment of the failure of the business in one year, after operating successfully for 100 years.”
Now, having moved on to a highly rewarding new career as a teacher of English as a second language, Robbins has put the experience behind her. “The best thing is to say, Okay, this has happened, I’ve done my best and now I need to get on with it,'” says Robbins. “And that’s what I’ve done.”
“I wasn’t prepared for their self-inflicted pain”
Ralph Leung figured that selling his consultancy to an international heavyweight would give him the connections needed to land big clients in new markets. Leung, who planned to stay on indefinitely after the sale, knew he’d have to live with a degree of bureaucracy after relinquishing control of his 25-person firm to one with 300 times as many staff. “Fine, I’d have to fill out a time sheet,” he says.
What Leung (not his real name) didn’t expect was for the European acquirer to try pigheadedly to force his company into a corporate mould — even if that destroyed the entrepreneurial culture that had made his firm a success. “I wasn’t prepared for their self-inflicted pain,” he says.
During the sale negotiations, the buyer’s North American head had assured Leung that “these guys will let you run your own show as long as you’re doing all right.” It was an empty promise. For instance, Leung’s consultancy had previously used bonuses to send unmistakable signals to salespeople, such as rewarding a star with a 40% bonus while punishing a laggard with just 2%. The new owner forbade such stark distinctions and capped bonuses so tightly that top performers started getting restless.
Leung also had his hands tied in other areas. In the past, he would placate unhappy clients with free service for a month while his team worked to repair the relationship. And if an employee had to go on a long business trip, he’d have her dog walked or driveway plowed while she was away — a low-cost loyalty booster. Now, Leung had lost the freedom to violate corporate policies against giving away service or providing benefits not available to every employee. Although he privately agreed with his team’s unhappiness with these policies, Leung felt compelled to spout the corporate line. Yet he cringed inside: “My staff would give me that look — Are you serious?'”
Finally, Leung told head office that his best people were about to quit, and he as well. A new executive flew across the Atlantic to investigate — and concluded that Leung was right. He fired Leung’s boss and persuaded Leung to stay on by giving him the latitude to maintain an entrepreneurial culture.
Leung was astounded. “I didn’t expect the company to eat its own,” he says. “But the acquirer had done some other acquisitions that had failed miserably because of these sorts of issues, and the new guy didn’t want that to happen again.”
“We wondered, Why did you take us over?'”
Here’s a possibility to keep you awake at night: the buyer who’s so keen to buy your business might have no clue what he’ll do once he owns it.
That happened to Shelley Mortifee after she sold her tech firm to a major player in her sector, and it bewildered her.
“I had always envisioned that a big company would take us over and we’d do all these things we couldn’t afford to do previously,” says Mortifee (not her real name). “But afterwards, we wondered, Why did you take us over?'”
During Mortifee’s post-sale management contract, it dawned on her that the acquirer was unsure what to do next. When Mortifee made proposals to exploit a hot new market niche, her new boss fended her off, saying, “Let’s hold off for now” or “Let’s see what the budget is for the next quarter.”
As the acquirer left Mortifee’s former firm to stagnate, she says, “I got tired of being paid to do nothing, which for an entrepreneur is a form of torture.” She had so little to do all day she “became a pro at Sudoku” and filled her “embarrassingly empty days” by considering her next business venture.
Eventually, she couldn’t stand it. Mortifee cut short her planned two-year management contract to just six months, and left to launch two startups.
By then, she knew why the new owner had let her former firm languish. The acquirer’s president wasn’t sold on the niche that Mortifee had identified, and he instead directed the parent company to pursue an opportunity he had spotted. Meanwhile, no one bothered to devise a replacement growth strategy for Mortifee’s company.
Four years later, the opening that the president thought he saw hasn’t panned out, whereas the one that Mortifee had pushed for has paid off big — for rival firms, that is. Meanwhile, her old company’s staff has shrunk by almost two-thirds.
Mortifee says her frustration faded away as she made successes of her two new startups. “It’s disappointing to see a business you worked hard on become a non-growth company,” she says. “But I no longer have regrets, because selling my company allowed me to move forward to something I’m more passionate about.”
“It took four years for us to make up the lost ground”
E-tailer Alexander Watzke was displeased at the apathy he increasingly felt when the new owners of his company paid little attention to him or his company. He says that being ignored made it tough to focus on his job, yet his repeated efforts to be heard led nowhere. In the end, Watzke gave up and spent much of his time at work thinking about his next business venture.
Watzke had planned to walk away after the six-month transition. And he did, in fact, launch another successful startup. But when he saw that the acquirer of his former firm was leading it to ruin, Watzke couldn’t resist the chance to give what he still thought was a great business idea another go. Six months after his post-sale management contract ended, Watzke and his partners bought back their old company for pennies on the dollar.
They eventually made it a smash hit, but only after a Herculean effort that Watzke says took far longer than he and his partners had expected. “It took more than a year to turn it around,” he says. “And it took four years to make up the lost ground and pass the companies that had overtaken us during that first year.”
Still, repairing his old firm also repaired Watzke’s spirit. He felt his normally high energy level returning as soon as he regained the freedom to act as an entrepreneur. “Once we took charge again and were back to being responsible for the outcome,” says Watzke, “my regrets were gone.”
A NO-REGRETS DEAL
Don’t let the possibility that things will go sour after the sale of your company deter you from selling. Take these steps to tilt the odds in favour of a happy outcome.
Be prepared for an out-of-the-blue offer: Peter Churchill-Smith, a partner at Newport Partners, a Toronto-based financial adviser to entrepreneurs, says you’re more likely to be unhappy with your deal if you receive an unanticipated offer without having prepared for one. “Once the puck has been dropped and an offer is on the table, there’s very little time to step back and look at the big picture,” he says. That’s why now is the time to look at the big picture. Churchill-Smith, who has 30 years’ experience advising sellers, recommends thinking through alternatives to selling (such as becoming an acquirer), when would be a good time to sell and whether to hold out for an ideal buyer.
Give your staff reason to celebrate: The employees who helped build the business might find it tough to watch you enjoy a big payday while they wonder whether they’ll still have jobs. Providing your people with equity in the firm before an offer is in play will give them an incentive to join you in welcoming the sale of “our company.”
Call in the pros: The acquirer has probably done this sort of complex, high-stakes deal before — or has advisers who have. To avoid being outgunned, get the help of a seasoned pro who specializes in helping business owners through the sale process.
Get a little help from your peers: As well as a professional adviser, you should seek advice from those who have sold a business, whether through your own network or a peer group such as Entrepreneurs’ Organization, Young Presidents’ Organization or TEC (The Executive Committee). When Newport interviewed more than 100 Canadian entrepreneurs who had sold their firms, just 17% had sought feedback from a friend or mentor — yet 53% would now recommend it.
Start planning your post-sale life now: You’ll need to fill a hole in your life the size of your former firm. Prepare for this by setting personal goals that have nothing to do with your business. And think concretely about what you’ll do next, such as founding another company, lending your business skills to a charity or going on a world tour.
Accept that change is inevitable: The buyer likely won’t have a clear plan for your company until he’s in charge, says Doug Robbins, president of Hamilton, Ont.-based Robbinex Inc., who has advised sellers for 36 years. Robbins says one thing you can count on is that your firm’s new owner won’t run things the same way you did: “It might happen right away or it might happen a year from now, but there will be a lot of changes.”
Decide how much you’ll settle for: The perfect acquirer — one who shares your vision for your firm and has what it takes to execute it — can be as elusive as the perfect mate. Figure out whether your legacy is so important to you that you’re willing to wait patiently for the ideal buyer. If that legacy includes setting restrictions on what the buyer can do with the company post-sale (e.g., moving to a new city), determine whether you’re willing to accept, say, 30% to 40% less money.
Let it go: The new owner has the right to run your former firm as she sees fit. Keep telling yourself, until you truly accept it, that “it’s not my baby anymore.”
THE DREADED TRANSITION
Even entrepreneurs who have gotten over the upheaval of selling their business are unlikely to look back fondly on one stage in the process: the post-sale period in which many sellers stay on to help the new owners figure things out. Here’s how to make the best of your time under the dreaded “management contract.”
Assume that you’ll hate it: After being your own boss, it’s tough to drop down to being a mere employee. Gird yourself for this lower status, reminding yourself that it’s only temporary.
Negotiate a clear job description: Leaving things vague—”I’ll teach the new owner how to run the place”—is a recipe for conflict. Agree on terms that make it plain what you’ll do all day. Will your role be purely advisory? Will you have any operational responsibilities? Will you have decision-making power in any areas?
Get out ASAP: It’s common for sellers of private companies to commit to staying on for one, two or even three years. Yet most never cross the finish line. Ask whether the acquirer will agree to a shorter stint, such as three months full-time, three months part-time and six months during which you’ll still be available to answer his questions.
Identify acceptable trade-offs: Astute buyers know you’re anxious to get out of there. If you want to leave after six months, be prepared to give ground on key terms such as the amount and timing of cash and stock payments, whether up front or deferred. You may find that what you’ll have to give up is worth it.”