This Insight has been contributed by Dr. Steve Krupp, a highly respected and valued colleague of mine at Right Management and Heidrick & Struggles.
He and I shared opposite “sides” of the two transaction narratives that he shares here. In both cases, I would describe the agile leadership/entrepreneurial approach taken by Steve and the firms he led as “Best Practice”, and well-described here. I believe there is significant practical wisdom in this Insight that can and should be applied by any professional services founder/owner/leader in contemplating selling their business.
Chris Pierce-Cooke
Starting and growing a business takes intense emotional commitment, blood, sweat, and years of hard work to achieve success and be in position to attract prospective suiters. It is no surprise that founders and owners find it hard to pull the trigger and often sub-optimize rather than fully maximize the impact if they do. I traveled this journey twice as a seller of boutique consulting firms to larger human capital companies both of whom were building adjacent businesses via acquisitions. I have witnessed dozens of transactions either as a buyer or alongside business owners who sold boutique consultancies. Along the way, I accumulated lessons that might be useful to entrepreneurs considering a sale.
To scale, grow and monetize many entrepreneurs endeavor to sell their business which is often forged with their own identity. One dilemma is that the qualities that contribute to building are not always compatible with joining another organization. Being strong-willed, decisive, risk-tolerant, and action-oriented can get you far, but may not get you where you thought you wanted to be in a larger system. Sellers tend to focus on the upsides when envisioning a big liquidity event. The same entrepreneur is likely to pay more attention to downsides only after it is consummated. This sometimes looks like seller’s remorse. I have asked myself and others, do you remember why you freely and deliberately chose to sell your business? This can get lost in translation when a seller bemoans some frustrating new realities. Lack of strong alignment across the seller team can exacerbate the challenge of navigating the paradoxical pulls inherent in any successful transaction.
Agility: What it is and why it is mission critical for successful acquisitions
Agility is a key success factor for navigating consequential business transitions. Besides living this firsthand, our team has done extensive research and advising on leadership agility which is vital to executives facing the uncertainty and disruption that has become the norm. Our research on high performing organizations and leaders at Heidrick and Struggles demonstrated that the biggest differentiator between accelerators and the rest was agility. The agile were better able to reinvent in a new strategic context.
Agility is the ability to pivot quickly with an open, flexible mindset to changing conditions. This is the underlying capability of future-readiness. Agility is critical for leaders in any organization and particularly to entrepreneurs selling and integrating their business. Embarking on a transaction requires a radical shift in mind and skill set that is enhanced by 4 capabilities: Foresight, Resilience, Adaptability, and Learning.
Foresight: Anticipating and being prepared to pivot in a dynamic world.
Foresight is essential to entrepreneurs seeking to sell their businesses because it is a choice that requires strategic intent and clarity. Of all the options to grow the business revenue, profit, value, customers and solutions, why is selling a preferred option? Foresight is also useful in identifying types of companies or industry sectors that would be preferred target buyers from a strategic growth perspective. If you develop a deep understanding of emerging trends in your industry, you can anticipate how your firm can add future value and who are optimal targets for a winning combination. In the best case, business owners would look at several scenarios for growth including M&A, weigh the options and conclude that a transaction might be an attractive option if it meets certain criteria. But why?
In the two cases where I was actively involved in selling a business, there were several clear benefits. We believed we could accelerate growth with access to a stronger sales channel, more marketing muscle, state-of-the-art technology and the resources to add top talent. In a nutshell, we wanted to scale and that seemed more likely with a larger brand, platform and investment capacity. Of course, this was also a way for the owners to monetize their investment if the deal terms could be agreed upon.
Strategic foresight requires due diligence including surfacing and addressing, with the seller team and perhaps the buyer, that there will be tradeoffs. There must be acknowledgment that some autonomy, decision speed, and old ways of doing things will be lost. This seems self-evident, yet I have spoken with entrepreneurs who expected positives like new business introductions and resources, but were not prepared for needing approval to make promotions or hires, adhering to brand standards, financial reporting requests that seemed more bureaucratic than value-adding, or other parties wanting complete access to your products. Some of these expectations might have been envisioned with more foresight, but one can be blinded by attractive upsides. Go for those full speed ahead, but eyes wide open, so your team is prepared for the ups and downs. If you plan and choose strategically, based on forward-looking vision and culture fit, you are more likely to optimize a transition.
Foresight applied: Articulate the strategic intent and value proposition for the deal, your team, and the acquiring business. Share and stress your future vision and assumptions with your partners to ensure this holds up even in the face of potential headwinds that should be surfaced and debated in advance.
Resilience: Bouncing back from setbacks with perseverance, energy, and ownership mindset
Running a small business, especially with multiple partners is daunting. This gets exacerbated in the face of a potential transaction. Selling is filled with ambivalence. Unless ownership and decision-making are dominated by one shareholder, exploring a sale can put strain on team cohesion. Not all may agree on the sale rationale. Even if there is shared commitment to the strategic intent, shareholders might differ on the ideal target, timing or valuation. What might turn out to be pseudo agreement often unravels when real prospects show up and choices must be made. The deal team must stay aligned, transparent and prepared for a roller coaster of surprises, highs, and lows. Most successful entrepreneurs have tenacity and staying power, yet shared resilience will be required when conflicting priorities or values surface with prospective buyers or on the seller team. Trust and control issues will be tested. In one case where I was involved, two partners had to buy out the third to get unstuck and ultimately move forward with a deal.
Resilience will be tested further post-merger. Whatever integration strategy or model is established, there will still be different expectations about how and at what pace. The transition from seller autonomy to increased buyer involvement might be gradual. Often, sellers maintain much control in the beginning phases, but sooner or later more stakeholders will be part of business decisions. The entrepreneurial culture will be tested. For example, one firm where I was a seller had a very flat, non-hierarchical model. We hired smart, young graduates from top universities, engaged them quickly on client work and solicited their input on assignments, strategy and operations. They were encouraged to share diverse views and challenge the status quo with ideas valued more than titles. When joining a traditional firm, with more accentuated hierarchical levels and less challenge, there was an adjustment period requiring problem-solving and resilience on all sides to ensure our talent stayed engaged, felt valued and did not hold back on constructive debate.
Resilience Applied: To enhance resilience, keep your team focused on the big picture, vision and purpose for the merger and how everyone can win. Define expectations clearly and align on future ways of working within the seller team and buyer. Agree on mechanisms to resolve differences but realize that no matter how much you anticipate or codify some ambiguity comes with the territory.
Adaptability: Shifting priorities quickly to create new business models and ways of working
The cliché “what got you here, won’t get you there” is particularly relevant in a transaction. Merging into a larger enterprise requires that you become aware of the mindsets and biases that were in the DNA of your boutique but might not fit the future. For example, as a small firm we were proud of our flexibility in adapting roles and levels to create opportunities for progression of key talent who were impatient but not ready for a full jump to the next level. By necessity, a larger organization’s talent system needs more consistent standards. Adapting old models is particularly critical if you decide to accelerate integration quickly. Typically, the buyer will want to integrate faster than the seller. This might even be built into the deal. On the other hand, financial terms, earn-outs, accounting systems and deal metrics can make it difficult or undesirable to integrate revenue or profit calculations.
Leaving deal term considerations aside, my observation is that the faster you integrate the better. Unless, you operate as a stand-alone unit, there are good reasons to adapt and align business models. If you have chosen to do the deal for sound strategic reasons, it makes sense to capitalize sooner rather than later. The longer you hold on to your brand, business operations, and processes, the longer it takes to achieve the upsides envisioned. Often, I hear sellers say, we will integrate after our earn-out and the deal terms might dictate that. My view was that more rapid integration would enhance business results and earnouts which are time-bound. There will be frustrations with processes for tracking time, utilization, billing and things your team figured out before. Although some of the buyer’s systems may not be conducive to your old business, the sooner you adjust, influence or reinvent the better. Remember the longer game and bigger upside you are going after and directly address barriers that are material versus minor less consequential inconveniences. This applies to collaboration and consensus-building with a larger set of stakeholders. It might feel like creativity and speed is constrained but take advantage of different perspectives and collective wisdom to build something better. In my personal cases, our firm was one of many that were acquired. Although this was ragged at times, we ultimately had the opportunity to shape the strategy, solution mix, culture and team to drive growth beyond what the prior firms could have done separately.
Adaptability applied: Identify the critical shifts required to optimize the merger, what old assumptions will need to adapt, and what is sacred. Once the deal is communicated, engage in an open team discussion about the mindset changes that can speed value creation. Identify options for where and how to best integrate versus what elements must be preserved.
Learning: Testing ideas, experimenting, and continuously innovating in real-time
Entrepreneurs seized on an opportunity and brought their idea to market. With success one can easily fall into a pattern of relying on what has worked and sticking with what you know best. However, in a new venture, what you know may be less important that what you can learn, and how fast you can apply it. Those who are curious will be better suited to continue innovating as compared those who know it all. Share the wisdom accumulated building your business with your new colleagues while staying open to new ways of working or solutions. This is especially important and challenging with thought leadership. Many professional services firms owe their success to proprietary intellectual property they invented, and the transaction might have been driven in part by the acquirer’s desire to obtain and scale your products. There is an instinct to keep your IP pure and rely on tools you invented. This seems logical, but sometimes the wiser move might be to integrate IP or select the best in class. Competing or overlapping solutions inevitably confuse your BD colleagues and clients. We merged our core assessment instrument with one the new firm was launching. This was hard because ours mapped to a book we wrote and prior IP, but we concluded that a cleaner more aligned set of solutions would enhance our go-to-market strategy.
Optimizing a new distribution channel is one of the most important things to learn. New business will not be handed to you on a platter although that is sometimes a flawed seller assumption. Because client relationship managers don’t know you or your products, there must be trust-building and mutual learning. Figuring out how to partner on leads was our single biggest post-merger integration success factor. We never expected business to fall in our lap but believed that any new door opened was one more opportunity than we had before. There will be disappointments, misunderstandings and conflicting expectations, but blaming others or circumstances won’t help. Learning from every success or failure will. After all, the acquiring firm was successful enough to buy you so there will be something to learn from accomplished people there. A spirit of curiosity will help drive lasting integration and co-innovation into the future to truly realize those synergies that you envisioned. Encourage your team to stay curious, keep an open mind and promote a spirit of collaborative problem-solving. It was exciting to see junior members of the team embrace new practice areas and grow exponentially. Those who just wanted to keep doing what they always did were less likely to thrive or stay.
Learning Applied: Whoever learns fastest has an advantage. Get curious about new offers, products or experiences and how your IP or practices can be integrated with others. Experiment with new-go-to market solutions or strategies that leverage the buyer’s assets and expertise.
Agility for the long term
There are excellent reasons to sell or merge a firm. When done well, the upside can be significant for all. I have been fortunate to participate in two successful transactions. What I have learned is that even in the best-case scenario, agility will be critical for seller and buyer. Most important is to view a transaction through a long-term lens. There is typically a great deal of focus on the immediate deal terms and the financial implications for all parties. Sometimes this feels adversarial. It is true of course, that agreeing on the terms, numbers and acquisition model often engenders tension and negotiation. It is important to balance this with building the trust, spirit, and plan that can yield a win-win for the initial term of the deal, but just as important for the long-term strategic impact. There are countless success factors and traps inherent in this process. Being agile in the face of major reinvention is hard and no panacea. The more you can apply some of these principles, the more likely you will be to optimize both the growth, reward and value creation opportunity for all.
Authored by Steve Krupp