When I majored in History in college, we studied 18th Century rulers, known as Enlightened Despots; absolute monarchs who pursued legal, social, and educational reforms inspired by the Enlightenment. In other words, they were kings and queens who were trying to provide a better life for their subjects, rather than just themselves. As with Enlightened Despotism, we are suggesting you practice Enlightened Buying. The time period between the Letter of Intent, (LOI), and the Close is the most critical and dangerous to your success in the process of acquisition. The transaction becomes real for the seller in a way that it has not before. As you will see, being enlightened and understanding might just be your best course of action.
The assumption is that the Seller has signed the LOI, which hopefully outlined what you are buying, the structure of the deal, and the price you have agreed to pay. It has outlined in somewhat general terms what role, if any, the Seller will play, post-Close. Now it is time to address the details of the transaction and the Transition. The document is usually called the Definitive Agreement. It should be drafted by an attorney.
When you present the LOI, you should set a date for the close. We used to give ourselves and our clients about 30 days to complete the due diligence, make any last minute changes to the offer, and go back and forth with the seller, to get the Definitive Agreement ready to sign. Over time, we learned that this is rarely enough time. You can do everything right. The Seller and you can agree on everything. However, attorneys work on their own time. Buyer and Seller each have attorneys to protect their interest. The Buyer has usually spent time with his or her CPA at this point, but the Seller will want to have his or her CPA look at the Definitive Agreement. We recommend you agree to 45 days, Be prepared; it may stretch to 60, but you do not want it to be too long, for reasons you will see below.
Do not make the mistake of walking into the Close with a Definitive Agreement that the Seller and his or her attorney and tax professional have not seen. This seems obvious, but advisors do it and it causes delay and quite often hurt feelings on the part of the Seller. It has killed deals before. We are sometimes asked to step in to salvage a deal that has gone bad; this one reason has happened more than a few times.
It is during these 45 days that we suggest you become the Enlightened Buyer, (if you were not before). Consider the Seller’s point of view. You have agreed to sell the business that it took you perhaps 40 years to build. You know it is the right thing to do; your spouse wants to travel and see the grandchildren while you are still young enough to enjoy the trips. But this is where you have gone to work 5 or 6 days a week, for those 40 years. The clients are your friends and even your family. You will now go from being their trusted advisor to their former trusted advisor. It is not like retiring from a company where you worked, you are the company. When someone asks you what you do for a living, you don’t give them your title at a company or say, “I work at Microsoft,” you say, “I am a Financial Advisor.” It is your core identity. The day of the Close, technically, you can no longer self-identify as such. Having worked with dozens of them, I can tell you it hurts.
Let’s suppose you will be staying on, either to effect the Transition, or you are going to work in the office under the Buyer’s umbrella for a couple of years. What does that prospect feel like? Prior to the Close, you owned the place. Everyone in the office worked for you. You made all of the client decisions; all the investment decisions. Now, someone else is making those decisions. How is it going to feel the first time you do not agree with the person making the choices? Sometimes, during the Transition, a Seller will actually get physically ill the first time he or she sees someone else’s name on one of the client accounts.
If you do not think this is an emotional roller coaster for a Seller, try this. For the next month, you make no decisions about anything. At home, your spouse or children make all of them. At the office, your staff gets to decide everything. (Of course for me, this would be no change. I make all the decisions and my wife tells me if they are right or not.) If you were crazy enough to do this, you would get just a taste of what is about to happen to the Seller.
Would this situation make you just a little touchy? A little sensitive? Trust me, it does. We are not talking about two big corporations where most of the negotiating is being done by faceless attorneys. This is a very personal transaction between 2 or more individuals, where attorneys really do not come into play except when it comes to the final documents. For 45 days, you have to walk on eggshells! All it takes is for the Seller to feel like you do not respect him or her as a professional and the deal can implode. At our consulting firm, this is such a sensitive time period that we make every effort to limit the time the Buyer and Seller spend together except in structured, meetings that are just short of scripted conversations. By the way, it is not necessarily the Buyer’s fault. The Buyer begins to look at the book as his or hers. This is understandable. Many times he or she is shocked when a comment causes the Seller to get upset. It is easy to do if you are not aware of how things sound to the other person in the room. You have to be hyper-aware.
Start by making sure the Seller understands that you empathize with what he or she is going through. Admit that you will make mistakes, (do this early and often). Watch body language and try to communicate in person or verbally. My biggest pet peeve about email has always been that you rarely get the emotion behind what someone is saying. Limit its use. Never, never, text. Think of it as worse than driving and texting. It is soulless. It kills deals. Have you ever misunderstood a text or email? Enough said. Trust is slow to build and quick to lose. Statistics indicate that when it comes to an advisor deciding to sell, 60% of the decision is emotional and only about 40% is financial. Given this, it is no surprise that a loss of trust in the Buyer can be one of the top reasons a transaction will collapse. A misunderstanding can cause a severe breakdown in trust and kill a deal.
This past weekend, I attended a Christmas Party for a client. My son also works there. I was for the first-time, introduced as “Adam’s Dad” rather than the “Consultant that helps our firm.” I am very proud of my son, but I also experienced a slight tinge of regret in realizing that I too am getting long in the tooth and my identity is changing in some peoples’ minds. This is miniscule, compared to what the retiring advisor experiences.
Finally, if you are not someone who has much patience with people’s emotions, find someone you trust and get them to do most of the communication with the Seller. This should start at the beginning, in your first meeting with the Seller, so they know that this person speaks for you. Do not let your ego or your need to control stand in the way of making a deal that could substantially improve your firm. Be Enlightened.
This series of articles attempts to help First-Time Buyers avoid pitfalls inherent in the process of advisory firm acquisition. Watch for new articles each week.
Casey M Corrie, President
Moisson Partners, Inc.
Mergers. Acquisitions, Consulting, for the Advisory Community