The Bottom Line of Happiness

From LOI to Closing Table: Checklist for Managing Surprises, Problems, and Stress

Here is a useful checklist to help you navigate the sales and closing process. It will help keep you focused during the turbulence that you are likely to encounter during the due diligence process.

Be in touch with your goals, and reference them often. Your goals are the eyes down the runway that you need to keep in mind as the distractions appear. Having them close at hand will help you make good decisions when corrections are required.

Manage employee expectations. Managing employee perceptions and emotions is an important part of the exit process, especially for the BHBO. Each business is different but establishing the timing and narrative of the exit is far better than allowing rumors or the shocking reality of an exit happening to create its own set of issues. Having a communication plan outlining reasons and expectations is critical as you begin the process; then you can decide the timing and groups who receive the message. An external exit also can represent more of a threat of job loss or culture change than an internal exit. I generally recommend that secrecy is maintained until a sale is imminent—especially before potential buyers start touring your facility.

Manage customers. This is a far simpler communication process, but still important. Of course, you have no obligation to say anything. Still, the succession plan of a business can be a very positive story to tell customers: It makes you a more reliable provider of your goods and services. Prepare a strategy and communicate it after the transaction occurs.

Manage family members’ expectations. The potential for a liquidity event can create many expectations of family members. You can keep your eyes down the runway by referring to the estate plan you’ve created.

Manage team members. The most crucial point to remember is that, while team members provide tremendous insights and assistance, you oversee the process. Items found during due diligence can be particularly contentious, and a good attorney will be inclined to fight for every inch. But sometimes, with your eyes on your goals, you need to tell your team to back away.

Manage your expectations, emotions, and stress. The process of negotiation and signing of LOI occurs before the buyer has analyzed every imperfection in your business. Understanding and accepting that due diligence will uncover something unfavorable will help you manage the emotions when it happens. You will also likely be working harder than ever as you try to maintain your business as questions and requests are in full swing. Create your own safe space (time away from everyone) to make decisions and think about the big picture. Do your best to find time for yourself to keep your stress manageable.

You need to keep all stakeholders engaged, but realize you are always in control, even if you don’t feel like you are. The process is likely to be one of the busiest and most stressful (yet exciting) times in your life. Knowing generally what to expect and keeping your eyes on your goals through all the crosswinds that will try to push you off the runway will help you grease that landing. Keep your eyes down the runway.

There’s a Llama on the Runway!

I’ve never seen a llama on a runway while landing, but I’ve seen deer, dogs, cows, and flocks of birds! When the runway is obstructed or otherwise unsafe, you need to go around. Yet, pilots can suffer from an illness known as “get-home-itis.” It is a tendency to see what you want to see, ignoring obstacles that may be in your way and risking a good landing (or a good flight) just because you really want to be home. In the context of your exit, the desire to get home can be just as great, but you need to continue to focus on whether the changing conditions will still meet your goals. Most of the time, they will, but sometimes you need to go around.

One of my clients had a tremendous offer from a strategic buyer. It was a mostly cash-upfront deal for an amount that was more than enough to cover his family’s goals and greater than he initially expected. Many surprising items came up during the due diligence process: The property was near a superfund site (potential pollution) more than fifty years ago; a large sale was being argued as being nonrecurring, thus subtracting from overall profit margins; and the salary of a family member was being questioned. The buyer asked for a slight reduction in the purchase price and for a small additional amount to be put into an escrow and restricted stock (to be unrestricted after three years). The client’s attorney also wanted more control over the terms of the escrow account. The deal almost didn’t go through because the client’s attorney was fighting for each small detail. But even after the changes, the adjusted offer was more than what was expected and more than what was needed, so the client told the attorney to proceed and closed the deal. The site was clean from pollution. Most of the escrow money was paid out. The stock in newco looks promising, and the client is enjoying developing a beautiful family property as they continue to support mission work.

Another one of my clients was approached by a strategic buyer through an intermediary that sought to find out whether my client was interested in a sale. Not being too far from considering an exit, they entertained the bid to test the waters. Initially, the offer and terms were enough to meet goals, but half of the offer price was tied up in stock with the purchasing entity. Due diligence ensued, and nearly every aspect of the deal was challenged early before any site visits. The proposed terms started changing rapidly: the amount of upfront cash, the length the client would need to remain an employee, the escrow amount, and, of course, the ultimate purchase price. It became apparent to my client that goodwill didn’t exist to move forward. The client decided to go around and continue to build the business.

Another of my clients with a large business thought an exit may make sense after hearing about high multiples being offered in his type of business. After hiring an investment banker, the young client had several appealing offers on the table. The offer ranges were more than enough to meet the client’s financial goals, but his gut had nagging questions: If they’d offer me this much, could I build the value even higher? What are my aspirational goals? And the most important question: What will I do with my time if I sell? He ultimately decided not to sell because he did not want to be out of the game at his young age. One year later, the 2008 financial crisis hit, and it seemed as if he had made a terrible decision. And perhaps if he were older, it would have been. But he had time to recover. Now the business continues to thrive, and he continues to love working on it as the value has exceeded pre-exploration prices.

While an ESOP is an internal buyer, the initial valuation is a great example of a time for a go/no-go decision. I have seen both expectations of value way below and way above the actual valuation report. Naturally, when the value is below and not enough for goals, it is time for a go-around. If the value is enough, then a landing is possible.