Reasons the CEO Should Not Sell the Company
founders can sell their own
companies—unquestionably. They do it all the time. However, can they do
it effectively? Can they run the company and at the same time devote
the significant time that sell a company requires? Will they reach out
to a wide range of buyers and generate competitive offers? Will they
get the best price for the shareholders?
At first glance, it is
tempting for a CEO to try to sell his or her own company. After all, he
or she knows the company and the market very well. A CEO’s mindset can
often be characterized as: (a) I know the industry; (b) I know how to
negotiate; (c) I’m a smart guy… I can sell the company. In addition, we
will save a fee.
Over the years I have observed many CEOs
attempting to sell their own companies. Most CEOs do not engage in a
transaction process that leads to an optimal deal structure. Selling a
company at the best price and terms to the best buyer with minimal
problems is a difficult endeavor. CEOs often make rookie mistakes and
these blunders can cost the shareholders real money.
What follows are 18 common mistakes that founders and CEOs often make
when trying to sell the company themselves.
1. This Will be Easy
CEOs think selling a company is easy and the process straightforward.
Selling a company appears to be an interesting challenge as well.
they fail to realize is the tremendous amount of time and effort
required to do the job right. Without experience in M&A, they
the subtleties that can lead to a the best price, better terms and a
smoother process. Even if a CEO has previous M&A experience, he
she can’t be objective; plus, he still must run the company—a full-time
job in itself.
2. Too Narrow a
tend to pick the low hanging fruit, thus their search process is rarely
extensive. CEOs typically do a limited search, typically contacting
about six buyers. They think they know the market and which companies
would be good or poor buyers. Some are convinced that one particular
buyer will pay the highest price. CEOs rarely seek buyers in tangential
and fringe markets.
Once a CEO begins discussions, he stops
looking for additional buyers. He is content to engage one or two
potential buyers. Deals can fall apart; however, and it is smart to get
multiple offers and generate competitive bidding.
to additional buyers simply creates more work for the CEO. Many CEOs
tacitly assume that the incremental price will not be worth the
incremental effort. This is not the case.
3. No Full-Time
and contacting candidates is a full time task that takes several
months. This process can be very tedious—something that an executive
level person may not want to undertake. A CEO who is running a business
cannot possibly give full attention to a comprehensive search process.
can the CEO add the most value? Trying to sell it or continuing to
build the company? More value is created when the CEO continues to
build the company—increase revenues, serve customers, and develop new
products. The value of these activities will eclipse the value of any
5. Selling the
CEOs are accustomed to raising capital and they see selling the company
as similar to raising capital. When trying to sell the business, they
paint the same picture. They sell their vision—large markets, rapidly
growing revenues and substantial profits. They focus on where they are
going, not where they are. In other words, they are selling the future.
business plan is forward looking. It is about growth. A selling
memorandum is different. It is a snapshot of the current situation.
There is a big difference between selling the future and selling the
company as it exists today.
6. Presenting the
don't take the time to develop the proper documentation to promote the
sale. Most fail to draft a selling memorandum or even a short summary
of the acquisition opportunity. Most CEOs just send out the business
Since they are not M&A experts, CEOs are not aware of
what information should be communicated at different stages of the
M&A process. They will often give the wrong depth of detail—too
much information too soon or too little information too late.
7. Poor Positioning
generally are not skilled at positioning the company to potential
buyers. How should the company be presented? What technology or assets
should be emphasized?
Value must be viewed from an external
perspective, not from management's internal perspective. Since value is
extrinsic, buyers will view value differently. This may be very
different than how the CEO views value.
8. Glossing over
portray their company in a good light. “Everything is going great. We
have great marketing, great technology, and great people.” It is
difficult for them to view the transaction from the buyers’ eyes.
Glossing over the negatives is a red flag for most buyers.
rarely admit that they have done a poor job in marketing or sales.
However, a company with excellent technology that has not had the
capital to undertake a serious marketing effort can be positioned as an
opportunity for the buyer.
a buyer receives an inquiry from an investment banker, it signals that
the company is serious about selling. Buyers don't want to waste time
with a company that is not serious about selling.
10. Unable to
Ramrod the Transaction
CEO cannot push the transaction without appearing desperate. He cannot
call the buyer every other day. An intermediary can ramrod the
transaction, calling the buyer four times a week to keep the deal
moving. This is the advantage of being a third party; he is just doing
his job. Buyers expect him to be persistent. A persistent CEO, on the
other hand, is perceived as a desperate seller.
11. Setting the
CEO's own prejudices can cloud the value issue. Unrealistic value
expectations can be deadly. What the market is willing to pay may be
very different from what the CEO thinks his company is worth or ought
to be worth.
CEOs may want to sell only if the price is greater
than a certain threshold (where his stock options are in the money).
This may misprice the deal and it may not be in the best interests of
12. The Fallacy of
a Narrow Value Range
is a subtle mistake, but a common one. CEOs assume that value falls
within a narrow range and that an interested buyer will pay them what
their company is worth. This presupposes, of course, that they know
what their company is worth.
A technology company can vary
widely in value. The same company could be worth $3 million, $6
million, or $9 million depending on the strategic fit with the buyer.
The high price is three times the low price—a huge range of value!
Don't assume that buyers will pay similar prices.
13. Failure to
Manage the Process
sale of a company involves a multitude of detailed activities. The
process must be effectively managed. One doesn't just make some calls
and have a few meetings. A professional intermediary can, coordinate
the activities, overcome the inevitable obstacles, and move the
transaction along in a timely manner.
14. Not Listening
will tell a third party things they would never tell the CEO directly.
This enables the third party to pick up clues along the way about how
strategic the technology is to the buyer and how the buyer perceives
A CEO usually focuses on the points he wants to make and
what he wants to say. One must listen with big ears. What is the buyer
saying between the lines? What are they really after? A good negotiator
is a keen listener.
The negotiator's job is to figure out the
other side's issues and motivations. A danger is not being aware of a
problem before it becomes full blown. You can't head off a problem if
you are not aware of it.
are many ways to structure a deal; it is not simply stock or cash. CEOs
are generally not very imaginative in coming up with creative
structuring ideas in which both parties might be better off. The key to
good structuring is to understand the objectives of each party and have
an open, creative mind set.
can develop between the buyer and seller. To avoid an adversarial
relationship, it is a good idea to have an intermediary handle the
negotiations. An experienced third party will be more adept at dealing
with troublesome issues.
A case in point is negotiating the
president's salary and option package. Who can best negotiate these
items—the CEO himself or a third party? Let the third party be the bad
Valuing the Buyer's Stock
the seller receives stock from the buyer, what is the accurate value of
that stock? The public company's stock price may not represent its true
value. Most investment bankers have significant experience determining
18. The Fallacy of
Saving a Fee
loves to save a fee. Is trying to save a fee really worth it? Is the
amount of the fee saved greater than the incremental value that the CEO
could add by focusing on building the business?
A CEO creates
the most value by running the company effectively. He or she provides
leadership, keeps things running smoothly, solves problems and keeps
the team pulling in the same direction.
Rarely is the amount of
fee saved greater than the opportunity cost of the president's time.
Plus any fee saved is negligible in the overall context of the deal.
CEOs underestimate the time and effort required to do an effective job
of selling a company. There are many moving parts in the sale of a
company. The best thing for the shareholders is to have a professional
intermediary sell the company, not the CEO.