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‘Fired for no reason!’

May 24, 2018

By Martha Sullivan, CPA, CVA/ABV, CM&AA, CEPA
Partner, Succession Planning Practice Leader

    Martha leads HK’s succession and exit planning services division and is a regular contributor to Wisconsin’s InBusiness digital magazine.

    I recently got a call from my friend, Casey. “I got just got fired for no reason!”

    She had just started in a new job at “Acme Inc.” She was so excited about the job and building new relationships. The most troubling part of the experience for Casey, aside from the obvious, was she was left with no understanding of why it didn’t work out. She believed she was doing a good job learning the ropes. The only explanation given was “it’s not a good fit.” In Casey-speak, that’s “no reason” and certainly not of her own doing.

    This same week, I was talking with another friend, Sam, who is actively negotiating to sell his company. He was sharing his frustration about the buyer, James. James had approached Sam directly. Sam, having sold a company before, was confident that he could handle the deal without any help from a business transition or M&A advisor.

    In fact, Sam and James appeared to be on the same page. The two talked numbers. James offered $4.6 million, which he believed came close to what Sam said he wanted ($5 million). James shared his analysis and rationale with Sam. It was, in fact, a sound analysis based on the historical and trailing 12 months of performance.

    Sam took one look at the number and pushed back — hard. James’ offer bundled the real estate value ($1.4 million) into the total to arrive at a number that would be pretty close to what Sam said he wants. However, unbeknownst to James, Sam wasn’t including the real estate. He wants $5 million for the business operations only.

    Sam’s number is based on two things we commonly see sellers use as their rationale for their target price. First, it’s what he wants. He has no idea how the market would value the business. It’s just the number he feels he should get. Second, he sees opportunities for his current and future product lines and wants to be paid for the future cash flow, not the historical. James’ analysis, which appears to be consistent with how companies are priced in the market, isn’t swaying Sam. To Sam’s thinking, James is low-balling him for “no reason.”

    The parallels between Casey and Sam’s situations boil down to this: What is a reasonable expectation of risk and reward given what is known at the time? For Casey, was she being realistic about her actual performance? Was Acme realistic with its expectations about how fast an employee can ramp up in three days? Did Acme communicate their expectations?

    With Sam and James there was a similar breakdown in communication. Sam, having shared his asking price with James, wasn’t clear about what he wanted for the business versus the real estate. (Whether he should have shared his target price with James at all will be the subject of a future blog.)

    Sam’s expectation to be paid for the future growth is also problematic. Certainly, there is room for some negotiation and recognition of the market potential. However, Sam has made it clear that he:

    • Has been the predominant sales driver despite having a sales team on-board;
    • Has been slow to build the infrastructure and momentum needed to tap into the opportunities for growth;
    • Is not interested in having an active role in the company post sale; and
    • Wants all his money up front with no earnout.

    In short, Sam’s expectations are not realistic. Sam won’t be taking the same degree of risk as James needs to take to realize the growth in the company’s current markets. While there are strong opportunities to expand into new untapped markets, considerable research and development is needed to design the products. Further, there is risk that the relationships that Sam has will not transfer well under the new ownership. These factors suppressed the multiple James is willing to offer.

    There is another parallel between Sam and Casey’s situations. Both of these individuals went into the new situation without adequate coaching. Casey was re-entering the workforce after a considerable time away and was not skilled in how to perform her own due diligence on a new employer. When offered assistance, she stubbornly refused and wanted to do it all herself. She missed the signal, failed to ask the right questions before and after being hired, and set herself up for the fall. In the aftermath, she is turning her face away from the mirror.

    Sam is also doing it himself. He has had no counsel on a realistic valuation of his business or real estate, how to position his company in the marketplace to garner multiple offers, or what elements are common in letters of intent and offers to purchase. He, too, has set himself up for a rough ride — if not a fall — if he continues to go it alone and turn away from the mirror.

    The bottom line is that there is always “a reason.” The question is whether we will take the time to pause, understand, and learn from it, marshal our resources and advisors, and then move forward.

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