The Founder’s Guide to Buyer Landmines: 11 Questions to Ask Before You Sell

So you started thinking about selling your firm in the next 1 to 3 years…

In case you didn't know, research from PwC reveals that 75% of business owners regret selling their company just one year later. 

Most likely because founders only focused on the check size.

Few founders know the landmines attached to the person writing those checks—because those landmines rarely get disclosed upfront by each buyer group.

Let's pull back the curtains behind each buyer pool you'll come across so you don't end up joining the 75% "regret club" post-closing…

1. Investor-Backed Private Equity (PE) or Independent Sponsor (IS)

PE is the default path for many, but it comes with strings—usually industrial-strength strings.

The 5-Year Sentence: Are you open to working for another 5 years? PEs typically hold and flip businesses in roughly 5-7 years (to return capital to investors), and usually require you to stay and grow the company during that period. 

You'll likely retain 20% via Rollover Equity, so as to give you a "second bite," 5-7 years later. Translation: you got paid, but you're still working—though with increased pressure.

From LOI to close, PEs will have the highest likelihood of closing versus any other buyers—due to their experience.

But be advised that some (not all) are known to lock you up with a "highball LOI," only to nitpick your firm during diligence so as to justify the follow-up lowball months later.

Employer to Employee: Are you open to being an employee in your own company? Some founders are fine with this, though I've personally never met those people.

Having spoken to dozens upon dozens of founders, they all despised being an employee, suddenly taking orders they don't agree with, inside the company they founded and grew. 

Hired then Fired: Are you comfortable with the risk of possibly being fired? 73% of founders are fired within 5 years post-closing, from their own company, due to misalignment of direction and failure to deliver aggressive growth.

Investor backed PE or IS, operate under tremendous pressure against an unforgiving clock, where you're expected to meet aggressive growth targets in compressed timeframes.

Bankruptcy Risk: Are you aware of bankruptcy probabilities? 2% of normal businesses go bankrupt, but a whopping 20% of PE owned businesses go bankrupt.

Ex: Toys "R" Us, Neiman Marcus, Hertz, PetSmart, Claire's, and many many more...

The Focus Pivot: Are you ok shifting your focus from serving clients and staff, to serving investors?  After selling to PE, your focus now is to serve and please the investors who just wrote a fat check to you.

Your new "customer" is now a spreadsheet, IRR, MOIC, YoY/MoM growth, etc.

This is the seldom discussed pink elephant in the room post-closing. I personally know a handful of people who have experienced this immense pressure first hand.

Control at 2^nd Exit: Are you comfortable having no control as to who the PE sells your firm to in 5 years?

It'll most likely be a bigger PE. And the guy your team reports to at that time, might be a really great guy.

Or not. You have no say at that point.

2. Strategic Buyers (Other Accounting Firms)

A local, regional, or even a national firm, might be interested to integrate you into their bigger firm. You might be the first and only bolt on, or one of many—to grow that firm aggressively.

Investor pressures most likely won't be an issue, since SBA will let them buy your business at 100% financing, since they already own a firm. They already understand accounting, so it's just a matter of your team adjusting to the bigger firm.

If you're not the first bolt-on, then you will have a very high likelihood of actually closing after signing the LOI.

If you're their first and possibly only bolt-on, ask your dedicated M&A attorney to provide you all the hard conversation items during the LOI, to front load the tough topics, so as to eliminate the deal dying before closing, since that's what usually happens with first timers.

Cultural Dilution: Are you ok losing some of your company culture? Remember, you're moving into their house, so expect to lose at least 20% of your "special sauce" as you adjust to their platform's values and culture—which is similar to moving back in with your parents at 40.

Hopefully, there's enough fit during the mutual diligence process that at least 80%+ of their culture and values is similar enough (not identical) to yours that it's not a shock to your team.

Growth Shock: Is your team adaptable to fast growth and lotsa changes? Your team may face more change in 12 months than the previous 5 years combined.

If your team thrives in change > Great! If not, expect change fatigue and potential resignations. Not everyone enjoys drinking from a firehose. 

3. Self-Funded Searchers (Solo CPA's / First Time Owners)

This group of buyers will have their own capital that they've saved up (no investor to please).

Dead Deals: Are you ok dealing with buyers who will have the lowest likelihood of closing?  More often than not, they don't have:

a) The appropriate deal team.

b) Deep M&A knowledge or experience to go from LOI to close.

c) Understand the long list of required legal items that need to be addressed and negotiated with the LOI or Term Sheet. 

As a result, your beloved exit ends up becoming their practice deal, littered with mistakes, delays or dead deals.

The Intern CEO: Are you comfortable working with a buyer who has no management experience? Beware the buyer who has never managed more than a Starbucks order.

Otherwise you'll spend your retirement providing them with on-the-job management training, where you're the unwilling mentor and your firm is the classroom.

Look for a buyer with at least 5+ years of management experience over a team of your size (or bigger, preferably).

4. Internal Buyers (Children / Partner / Manager)

Ideally, these are the best buyers for culture and client retention, provided your definition of "financial freedom" is waiting 1-2 decades for a check that's 20%-50% smaller than what a stranger would have paid.

The Long Tail: How comfortable are you with getting paid over a much longer period for a much lower price?

Internal staff rarely have the capital to compete with external offers. So expect the lowest price for a much longer payout period, requiring much patience and prayers.

If they have the capital, you both agree on a price without compromising your relationship, and he actually has the history of running your company successfully, then that's probably your best bet!

Conclusion

These are generalized (not guaranteed) landmines and seldomly discussed realities. It's your job to discover your risk tolerance, lead with your values, and find the exception within your preferred buyer pool, through a carefully crafted set of qualifying questions.

The famous Billy Graham's wife once said to marry the person whose fault you can live with.

At the end of the day, the perfect buyer is the one who best aligns with your values and risk tolerance—not just the highest price. 

About the Guest Author

Mike Trillo is a self-funded buyer focused on closing quickly, preserve what's working, retain the team, maintain the culture, grow at the team's chosen pace—to keep for 25+ years. He is looking to acquire a non-attest accounting or CFO firm ($700k+), with an existing leader in place.

With a decade of experience managing a team of 50+ and overseeing $18M in operations, Mike combines corporate level management expertise with a founder-focused approach. His qualifications as a buyer:

• Financial Readiness—800+ credit score, $4M SBA pre-approval, $2M committed investor capital (if needed)
• Deal Team—Backed by a dedicated and experienced M&A deal team
• Closing Certainty—Deep understanding in navigating complex financial structuring as well as legal and technical nuances required to close quickly and cleanly.

If you're exploring a sale and want to have a casual chat about your options, feel free to reach out any time: www.EvergreenCapitalGroupLLC.com