Situation: A company has been approached by another company with complimentary technology concerning a partnership. The other company is young and rapidly growing, though at this time they are much smaller. The two companies are already collaborating on a project. There have been hints that this could develop into a merger. Under these circumstances, what’s the best way to develop a partnership?
Advice from the CEOs:
It’s always best to date and get to know the other party before exploring a deeper relationship. You are already collaborating with this company, so just continue on this path as you get to know them. See how the relationship and value of the partnership develops before exploring options that could result in loss of ownership and control.
Partnerships and moves beyond partnership are really about culture and values. Cultural fit is a huge question that is too often ignored when companies discuss partnerships and mergers. This requires more investigation than you’ve done to date. Wait until real challenges develop, and see how the two companies respond. Do they collaborate effectively to develop a solution or does the relationship become contentious. This will tell you whether a deeper relationship is worth exploring.
To be successful, relationships have to offer a win-win value that surpasses the cost of collaboration. There is always a cost to collaborating with another company if only in time and effort put into the relationship. Find a way to measure this cost so that you can compare it to the value received. The other company should be doing the same.
If you could buy the other company right now would you?
If you can’t tell the value of the company based on the information that you have, why would you consider a deeper relationship at this time?
Interview with Norman Boone, CEO, Mosaic Financial Partners
Situation: Many entrepreneurs who started companies in financial services and other industries are now 55+. They may be ready to move on, but not necessarily ready to move out. What questions should they be asking as they plan their exit strategies?
Advice from Norman Boone:
The most critical question is what you want to do with the rest of your life. Most people don’t give this enough thought. It all starts with what is most important to you.
Start with a self-inventory assessment – what are your resources, options, and what do you want to do or accomplish?
Discuss with your significant other or partner what will work for both of you.
Answering these questions helps to lay out the alternatives. Now, thinking about your company, what is important to you? Is it legacy, the future of your employees and business partners, the future of your clients? Does your business continue, or to you see a sunset?
If your business will continue, do you see an internal succession, or sale or merger of the company? If internal succession, here are the issues.
Who will be the new leadership? Do you have good candidates on staff, or do you need to hire someone who will take over?
Be careful not to expect your successor to be a mini-you. They need to be able to bring their own talents and perspectives to the leadership role, not try to duplicate you.
Do you need to beef up the training of current staff to increase their managerial capacities?
Is an employee buy-out an option? There is a variety of choices to investigate.
What will be your role during and after the transition? Will you accept that new leadership may take the company in new directions?
To be most effective, this needs to be a 5 or 10 year process. Ideally you will have two to four successor candidates to evaluate.
Do you sell to the highest bidder? Many of the questions here are like those above.
Will you sell to the highest bidder, or to the bidder who seems the best fit for your stakeholders and clients?
How much voice, if any, will you offer your employees and / or clients in the selection process?
What due diligence will you do on potential buyers?
Do you merge with a similar company?
If you can find a compatible merger partner the combination may be the best of two worlds.
What is the culture? If different, what will be the impact?
A merger of like companies may assume that the other party has a commitment to ongoing operation: but this is not guaranteed.
What will your role be, and what is the transition plan? How will you involve your key people in the transition?
The other option is to sunset the company. Here you must have enough in savings so that you can forgo future income from the business.
What about the other stakeholders and clients who’ve invested their careers and business in you?
Try to time your exit with the expiration of leases and other obligations to minimize exit cost.
How will you assist the transition of stakeholders and clients to new opportunities and providers?
Situation: A company is considering a merger. The other firm competes with customers who account for 25% of the company’s current revenue. How do you maximize the value of this merger to the company while mitigating the negative impact on current business?
Advice from the CEOs:
The maximum risk from the combination is loss of 25% of current revenue. The merger makes sense if you believe you will gain upside which more than counters this risk.
Both companies have brand equity. Maintain both brands and to continue to promote them. Maintaining both brands will buy you time to replace business which is potentially at risk.
Talk to customers and get their perceptions of the pros and cons of the potential combination. Ask about any concerns that they may have. Understanding the pros, cons and concerns will help you to mitigate negative fall-out.
Legally, in a 50/50 split, the Chairman will call the shots. You will have little recourse to counter the Chairman if he decides to fire you. This individual has built his company through previous mergers. Visit and break bread with those who were principals of these companies at the time they were merged or acquired. This will tell you a great deal about the individual with whom you entrusting your future. You will also learn what the others did during their mergers to help plan your own moves.
Give yourself a back door or Golden Parachute after six months if the merger does not go as you anticipate.
Situation: The Company has a merger / sale of the company pending. While most direct staff will be retained, roughly half of the indirect staff may be at risk. The CEO’s objective is twofold: to retain key indirect talent before and during transition, and to do right by those who have made strong contributions to the company.
Advice from the CEOs:
One member dealt with this a few years ago. They set up a retention fund for important but potentially impacted employees in advance of the anticipated transaction. The longer the employee stayed with the company through the transition, the larger the payout for which they were eligible. In the case of no transaction, the funds were to be returned to the company.
An alternate version of this option is to use insurance to fund a retention package for a group of key employees. This package may or may not be required depending upon the transition.
For potentially impacted employees, consider a retention package that rewards them for staying long enough to train the purchaser in their areas of expertise.
Look at outplacement services as part of the package for employees. Let employees know that this is part of the package if they are not retained post transaction.
Seek outside consultant expertise to assist in the design and administration of a retention package. Also look at your own network, and seek the advice of others who are well-versed with the technical aspects of employee transition.
Key Words: Merger, Sale, Employee Retention, Insurance, Outplacement
Situation: The Company is losing money and has been approached about a merger. The CEO’s ideal outcome would be to get cash on the table, integrate with the merger partner and continue business. The other alternative – downsizing – may hurt company morale. What are the best options available?
Advice from the CEOs:
The realities of mergers:
70% of mergers fail, and the merger process often leaves founders with a minority stake in the company.
Experience of others with partners has been disappointing – better to control your own destiny.
Look at all alternatives before you jump into a merger. You founded the company and have brought it this far. The company will be a different company following a merger, and not the company that you founded or have led to date.
Message to your potential merger partner:
Be a reluctant bride.
“We are making improvements to return to profitability and I’ve joined a board of CEOs who are consulting me through the process.”
If the partner sweetens the offer to keep the merger on the table, make sure that you get 51% of the merged company and retain control of your own fate.
Reconsider downsizing – Others have found the downsizing experience wrenching, but with far more positive results than they expected.
More on this in the next ceo2ceos blog.
Summary: look more closely at your situation before your jump into a merger. If you can save expenses, return to profitability and stay independent you will be happier.