is through the use of case studies. Our first one is instructive.
Case No. 1 – Walter, Peter and Anian
Walter owned a chain of three closet design and home organizing businesses in a large, populous state. Walter did a fair amount of advertising and so many people throughout the region knew of The Closet Admiral.
Walter had built the business up to the point where he could step away and do other things. He had brought in Peter to be the general manager of the three closet design businesses. Peter, being aggressive and confident in his abilities, insisted that he be able to acquire an ownership interest in the business over time. Walter agreed to this, but beyond an acceptance in principal, the negotiations had not yet begun and the terms for an acquisition of ownership had not even been discussed.
Shortly thereafter, Walter’s plans for the business changed. An opportunity to own an even more profitable business with a much greater upside potential had landed in Walter’s lap. To pull it off, he would have to sell The Closet Admiral in order to generate enough cash for the down payment he needed on the new business.
Walter decided to quietly solicit offers to purchase The Closet Admiral. He wanted to fly under the radar, so that no one would know of, or impede, his future plans. He didn’t tell Peter or his banker or any of his inside circle of advisors.
Anian owned a chain of five closet design locations in the southern part of the state. She was a hard-nosed businesswoman, always interested in a deal. When Walter approached her about a quiet sale she responded with interest. On a handshake, she agreed to keep the whole matter confidential. In reality, she just wanted to see Walter’s books. She wanted to know how he had been able to expand so quickly.
After reviewing the books, Anian placed two disastrous phone calls. First, she called Walter’s banker to demand why she couldn’t get the same favorable terms that Walter had received for equipment purchases. The banker was very angry that the confidential relationship between he and Walter had been compromised. Then, Anian called Peter to see if he would work for her. Peter learned for the first time that the business he thought he had an ownership interest in was for sale. He was furious at Walter for what he considered to be an offensive betrayal of trust.
Both Peter and the banker refused to do business with Walter again. Peter quit in a very loud and derisive manner, encouraging other employees to quit as well, many of whom did. The banker called several of Walter’s promissory notes, forcing Walter to scramble to find alternative financing, and killing all of Walter’s hopes for completing the other business opportunity he had sought to pursue.
The disruption caused Walter to almost lose the business. When the employees left they took some of their regular referral sources with them. Some of his best employees started working at two new, very competitive closet design firms – that Anian had opened up in the area.
Walter hung on by assuring the remaining employees that they would always have a place to work, that he was not selling the business, and that their job security was as important to him as it was to them. It took almost a year, but Walter brought the business back. And he had learned a very valuable lesson about the confidentiality needed when selling a business, and the care needed in selecting the right potential buyers.
As we have just seen, company sales affect more than just buyers and sellers. Customers, vendors and employees can all find out about the possibility of a sale, and emotional reactions are inevitable. Fear of what is to come may have some already looking for new suppliers, customers and jobs. The fallout can be far-reaching without the owner ever even knowing about it. Therefore, sellers need to be proactive from the beginning. Confidentiality agreements are a must to keep the news of a sale on a need-to-know basis. The agreement should be in writing with, if possible, a damage provision for the unauthorized release of confidential information. However, this type of contractual provision will only take the seller so far. Once the others find out, or are likely about to find out (and be assured, they WILL learn of a potential sale), the seller needs to start talking and alleviating fears. And you’d better have your story consistent and down pat, because your employees are going to want to hear something that is reasonable, reassuring and makes sense.
How to Handle a Failed Sale
If the sale does not go through and the company is taken off the market, the owner will need to talk to those involved and reassure them all that he or she is committed to the business and looking forward to future success. Any sense of failure projected by an owner will lead others into the cycle of uncertainty. As we all know from experience, uncertainty leads to fear. Fear leads to grasping for safety. And that search for safety can mean customers, vendors and employees finding new opportunities elsewhere and leaving the owner behind.
To allay customer fears after deciding not to sell, owners should redouble customer service efforts. It is unlikely that most customers will even know there was the potential of a sale, but the owner has no way of knowing who might or might not have heard the news. Customer service never hurts a business and making service a priority not only convinces those who did hear that you are recommitted to the business but may increase loyalty of those who never even knew anything was in the offing. For those who ask what happened, be frank but don’t give away details. Customers need reassurance, not a lesson in capitalism. As Henry Ford said, “Never complain, never explain.”
The fallout with vendors could have financial consequences. Most vendors have relationships with owners based on long-term rewards. They may offer good credit deals in hopes of keeping an owner’s business for a long time. The news of a company being up for sale makes those long-term hopes less likely. Don’t expect the news of the sale not going through to be a relief. It is likely that vendors will now see the company as a short-term investment (they will be wondering if the owner is still trying to sell, questioning his or her commitment). This is especially true with smaller, privately held businesses where relationships are more intimate. Owners may find vendors have hurt feelings about being kept in the dark. While from your perspective it is none of their business, from their viewpoint it is their business. Your business is their business. Appreciating their position will help in understanding the dynamics involved.
Employees likely will be relieved the company is no longer for sale, but they may have some of the same feelings as vendors and customers. They may still question owner loyalty. Once that happens, their own levels of loyalty are likely to decrease as they turn more toward protecting themselves. Morale is likely down. Owners might consider having a company party or perhaps a team-building retreat to reinvigorate the company.
No matter what work the owner puts in, the damage may be done. In the end, there is still the danger that not selling will cost the owner more than dropping the price would have.
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Rich Dad’s Tips
• Know your strengths and weaknesses before buying a business.
• Be prepared to accept complete personal responsibility for the success or failure of your business.
• As a seller of a business know and understand the consequences of a failed business sale.
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Let’s now review the strategies of buyers and sellers ...
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