Successfully transitioning the seller from being the “Most Important Person” (MIP) to a “Previously Important Person” (PIP) can have far reaching consequences on the success of the business you acquire. Preparing for this transition during the search process and being proactive about it once you are the owner will be essential to retain the value that a PIP and their legacy can have on the enterprise you take over, while mitigating some common risks.
Searchers are in a unique situation to move cautiously during the transition process. You will not be buying into a turnaround situation or needing to take immediate actions; you simply have to learn to operate the business. You will have the time to take advantage of the wealth of knowledge that the previous owner has about the industry, customers, vendors and employees.
What you will want
While you will learn a lot about the industry and markets during your due diligence, the seller has a wealth of knowledge that may be very difficult to extract and absorb until you are actually running the business. As you take over as CEO and form your own opinions and understandings, having them verified or disputed by the seller is very useful.
You will want a seller ready to help you post-close. It is crucial to avoid “seller remorse”, and have the seller be confident that they selected the right buyer for their business.
Surfacing the expectations of the seller around post-closing issues during IOI and due diligence and dealing with them will avoid problems after closing. However, it may take some prompting and repeatedly asking the same questions.
What the seller wants
The weeks leading up to the sale can be a very emotional time for the seller. Thinking about separating from a business they have led for decades can be disorienting. While tantalized by their future, the seller will not be sure how to pass the reigns before they can fully step away.
Most will have difficulty not playing an active role. Some sellers will fear the loss of meaning and structure in their lives – no longer having a place to go every day, not participating in day-to-day operations, and not being included in major decisions. As you move through negotiations, due diligence and even post-close, expect the seller’s attitudes to change – strive to be accommodating.
Be attuned to what is “special” to them and what they may want to take along with them. In my own case the PIP wanted to keep the “vanity” license plate number from his company car and to be sure his father had access to a key-making machine to duplicate keys for his friends. I listened and made sure it happened. Furniture, photos, memorabilia may be of no value to you, but provide a deep emotional connection for the seller. These small “gives” make it easier to achieve concessions on more important issues as they come up during the transition.
As a PIP, they will need you to plan their role after closing. Leaving it undefined leads to tension and uncertainty, so best to clarify their title as founder, or advisor-to-the President. Some searchers have graciously left the owner in their own office space, even though not there every day. Paul Thomson set up an extra office and gave the title of “Chairman” to Jim Yates and regularly utilized his skills for interviewing new employees and as a resource on the specialty insurance business. Demonstrating your willingness and capability to learn raises the trust level the seller has in you booth before and after closing.
Setting a plan to deal with the owner’s relatives or prior commitments to employees is important to address up-front. Clarify the need for performance and competitive compensation. Expect the seller to be reluctant to make any difficult decisions before closing.
When you repeatedly ask the owner their reason for selling the business, inquire about their intentions for life after the business is sold. Some have clear plans, but most remain focused on running the business until closing and the funds transfer. Gently reminding them to be thoughtful about it will nudge them to start considering their options.
What you can expect
Searchers report a full range of outcomes from this process, from hugely acrimonious legal disputes resulting in the seller starting a competitive business, to a lasting “relationship” akin to passing the business to the next generation. Each search is different and outcomes are challenging to predict.
Doren Spinner at Muir Beach Capital says: “While your relationship may be great on the day of close, typically it deteriorates over time, often to a level with lawyers and shouting. Don’t bank on being the exception to the rule. Keep the overlap short and crisp with clearly defined roles.”
After discovering some significant discrepancies in what was disclosed during due diligence, another searcher proceeded with a protracted 2-year legal action that was a huge distraction and emotional energy drain, all the while remaining a tenant in prior owner’s building. In contrast, Mike and Linda Katz have developed a close personal relationship with their seller that still exists after more than two decades. He claims that they were both his best “hires”.
While the economics of the transaction “align” the seller’s interests with yours, don’t be surprised if the seller’s emotional responses trump the financial considerations. Pro-active PIP communications are essential.
Stepping into your new roles
Set the stage as early as the IOI to clarify the seller’s post-close role and personal expectations. The give-and-take is part of the negotiation process and draws the focus away from valuation.
Once you take over, every change, no matter how small, will be scrutinized by everyone and reflect back on the previous owner. Move slowly with your changes as you learn the business. Avoid the terms “we won’t be doing it this way anymore” and stay focused on satisfying customers and fixing what might be broken. You will be in a fishbowl, with everyone observing the dynamic and you can’t ignore the level of scrutiny of your interactions with the PIP. Stressing continuity in the early months is much more important than an emphasis on change. It is expected that things will be different and you will be judged on how quickly you initiate these changes.
You can certainly expect employees will seek out the prior owner, either formally or informally, as it will take time for you to earn their trust. Over the transition period they will slowly loosen their bond with their previous leader and shift it to you. Don’t expect immediate “loyalty” just because you are the new boss. The previous owner earned it over the years, and it will take time.
As with your staff, customers and suppliers will also be soliciting “opinions” about you from the prior owner, not just for curiosity but also to assess competency. As time goes on, you will be able to establish your own credentials and trust levels, but the seller has a strong influence in this arena for the first 6-12 months of your ownership. Take care to change only as fast as your trust level grows.
Take up any disputes with the seller off-line and in private. Judge the relative importance of “being right” and acquiesce on things that can be deferred or are not significant. Let the owner’s quirks, like opening every envelope, be their legacy that you respect. Don’t spend a lot of energy revisiting or pointing to old policy as “wrong” or “not right” – focus on future and what to do now to keep the business running! This may be tough for you, to restrain yourself from overhauling the business too quickly. Be patient during the transition period.
Over-communicating goes a long way in reducing the seller’s sense of being “left out” or “disregarded”. They will appreciate your asking their opinion and remaining engaged. Even if you don’t take their advice.
In public, showing respect, praise and gratitude works better than overt or implied criticism of prior practices. After-all, the seller got the business to where it is and deserves recognition for that accomplishment.
Having been a searcher, a MIP and PIP myself, I have seen all of these dynamics play out. Unlike the valuation, legal and logistics issues, these transitions were a moving target and like any relationship in my life, took work and patience on both sides to be successful. Getting it right is as important as the financial considerations.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in!