Are You Being Your Own Worst Exit Plan Enemy?

When they first start to consider a business exit, many business owners believe that they want to sell their companies to a third party. These owners sometimes fear that tight-fisted buyers will be the primary enemy in the way of a successful exit. However, experience shows that business owners are their own worst exit plan enemy when pursuing third-party sales, because they succumb to two common Deal Killers.

Briefly, a Deal Killer is a negative aspect of the business or its owner that can kill a deal with a third party if it isn’t resolved before the buyer learns about it. There are several Deal Killers, but there are two that we regularly see in exit planning:

1. An unwillingness to recruit the best possible players for the deal team.
2. Failure to preserve the company’s most valuable asset: key employees.

Consider the story of Maxwell deHaan, a business owner who became his own worst exit plan enemy during the third-party sale process.

Maxwell was in the middle of exiting his business, deHaan Custom Tempering. His sons, Hogan (the company’s CPA and unofficial HR representative) and Dylan (a deal attorney), and daughter Hildegard (a business consultant), worked diligently to position Maxwell to sell his business within the next 12 months.

The siblings had taken pains to keep Maxwell as far away from negotiations as possible due to his short temper and refusal to agree to concessions. They were in contact with a buyer willing to pay $16 million for the business—double what Maxwell needed for financial independence—provided deHaan Custom Tempering successfully passed the buyer’s strict due diligence protocol.

Hildegard and Dylan both agreed that for their father’s company to pass the protocol, they would need to recruit additional advisors to address key business issues. Since a key aspect of the exit plan was the sale of the business, they knew that due diligence was a critical step. When they approached their father about this, he was livid.

“I spent all this money to get you all these degrees, and now you’re telling me you need more help?” Maxwell said. “Absolutely not. I’m not spending any more money on this. Get it done.”

As Hildegard and Dylan struggled to determine how they could get the company to pass the buyer’s due diligence scrutiny, Maxwell ordered Hogan to inform company employees that he would be leaving the business within the year and that the best performer would receive “5% of the final sale price.” Hogan, who always strived to appease his father, carried out his duty.

Nearing the end of the buyer’s due diligence team’s review, Maxwell summoned Dylan and Hildegard for their final report. Hildegard explained that they had managed to get the company “as close to compliant as possible” with the buyer’s expectations given their limited deal experience and resources. Dylan said that he would do his best to get the most money for the business (and his father’s exit plan) as possible.

As Maxwell berated Hildegard and Dylan, Hogan entered his office. He told Maxwell that Jeffrey, who was the company’s top salesperson by far, had resigned. In his resignation letter, Jeffrey said that Maxwell’s disregard for his years of hard work by offering a share of the final sale price to “just anyone” was the final straw and that he was leaving the industry to pursue opportunities that valued his work.

“Fine, one less paycheck to write,” Maxwell said. “It’s not my fault he’s having a bad quarter right when I’m ready to leave.”

“Dad, this is a huge problem. The buyer thinks that Jeffrey is staying on with the company. His leaving is going to hurt this deal,” Dylan pleaded.

“I’m paying you to figure it out. So, figure it out.” Maxwell yelled.

The due diligence review team came and went, with deHaan Custom Tempering failing in several crucial areas. Combined with Jeffrey’s departure, the best deal Dylan could negotiate was for $7 million, provided Maxwell stayed with the business for five years to give the buyer time to fill in the gaps Maxwell refused to address.

Maxwell demanded that his children decline the deal and take the business off the market, telling them that he would fix the mess they created. But without his key employee, deHaan Custom Tempering began to hemorrhage money. Maxwell never found a capable replacement for Jeffrey, and his children—who grew weary of their father refusing their professional advice—left the company one by one. Maxwell ended up liquidating the company for $2.5 million five years later.

A cavalier attitude toward Deal Killers is a common mistake business owners make in the exit planning process. If you’d like to discuss appropriate ways to avoid becoming your own worst enemy in the third-party sale process, please contact your exit planning CPAs. We’ll help you avoid these pitfalls in your business exit plan.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

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Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

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