Listen to This Blog Post
“Trying to drink from a firehose” is a common expression that is often used to describe a situation in which one has a difficult time processing an overwhelming amount of information within a given period of time. This certainly described my own experience, when in 2014 I became the CEO of a software company (after having acquired it from its original founders), powered by all of the wisdom and experience that one would expect from a 27-year-old who had never managed as much as a fruit stand in his entire life. The pace was intense, the volume of information to be processed was overwhelming, and the lessons learned were numerous.
In this blog, I attempt to share with you some of the major lessons and observations gleaned from my few months as the CEO of a newly acquired small business, in hopes that you can utilize some of them should you ever find yourself in a similar situation. It’s worth noting that some of these lessons may be applicable to new CEOs in general, whether or not M&A was involved in their ascension into the role.
Different forms of M&A can produce very different experiences, and thus the lessons that you extract from your own M&A experience may differ from those which I present below if your context is materially different from my own. For this reason, I suspect my experience will be most applicable to:
- Individuals who purchase a company and subsequently assume the CEO role;
- Externally hired CEOs who are joining a company after having spent time in a different business or industry; and/or
- Individuals or businesses who acquire companies in which the previous owner had played a material role in the company’s daily operations
This post may be less applicable for situations in which a) one business acquires another business in which the previous owner didn’t play an active operational role, and/or b) A new CEO has been hired internally, after having spent multiple years working within that same company.
Sellers: The Importance of Managing the Relationship
If you’ve purchased a business and are assuming the CEO role from the selling shareholder (who presumably will still be playing some defined role within the company for an agreed upon period of time), then one of the most important tasks within your first 6 months or so is to properly manage the relationship with that selling shareholder. Indeed, a non-functional (or worse, a toxic) relationship between the incoming and outgoing owners has the potential to significantly damage a company more than customers leaving, employees quitting, or competitors fear-mongering ever could. A non-functional relationship can divide the employee base, create confusion about who to approach with important problems and opportunities, and limit critical transfers of knowledge and relationships that the incoming CEO typically requires.
It’s important to understand that incoming Owner/CEOs will likely find themselves in a bit of an awkward position during their first few months on the job: On one hand, they likely just spent 6 months (or more) slogging through a protracted purchase process with the seller that was likely filled with contentious negotiations and several emotional disagreements. Yet on the other hand, almost immediately upon the closing of that acquisition, new CEOs will likely find themselves meaningfully in need of the help, knowledge and experience that only the person from whom they purchased the business can provide.
Incoming Owner/CEOs would do well to remember this during the negotiation process itself: Though buying a business can be an emotional and frustrating experience, remember that immediately upon closing, you will need the help of your counterpart much more than they will need help from you. Proceed accordingly.
Sellers: Be Thoughtful About the “Price of Peace”
After the acquisition closes, both parties are generally happy to have the negotiation process behind them. However, this doesn’t mean that potential points of disagreement between buyer and seller will disappear entirely. Indeed, numerous such opportunities will continue to exist. To begin with, there will almost certainly be disagreements around day-to-day operating decisions. Though the new CEO ultimately has final say (given that she is now also the new majority shareholder), it’s very difficult for outgoing Owner/CEOs to emotionally detach themselves from decisions that they otherwise would have made in their sole discretion just days or weeks earlier. Second, the working capital adjustment, which typically takes place within the first 1-3 months after closing, will introduce a whole new set of variables on which buyer and seller must again negotiate, often with large sums of money at stake (see my blog on The Working Capital Adjustment here). Third, in due time, it’s likely that there will be major strategic decisions over which there will be disagreement (personnel to add or remove, markets to target, changes to pricing, etc.), regardless of whether or not the incoming Owner/CEO solicited the opinion of the outgoing one.
During each instance in which you and the seller disagree on something (in my case, there were many such instances), the incoming CEO would be wise to consider the price of being “right” versus the price of an unconstructive and unnecessary divide between themselves and the sellers: For example, when negotiating my own working capital adjustment 3 months after closing, it was clear to me that a ~$10,000 variance was due to me, due to the working capital of the business being lower than the target that we had agreed upon during our negotiations. My sellers, however, firmly believed that I owed them a ~$10,000 payment. After going back-and-forth for a while, it became clear to me that if I pushed the matter any further than I already had, I would lose far more than $10,000 in value by way of a damaged relationship with the seller. For that reason, we acquiesced and simply paid the $10,000 anyhow, and attributed the decision to “the price of peace”.
In sharing this experience with you I’m not suggesting that you shouldn’t stand your ground when doing so would be appropriate. Instead, I’m suggesting that you act reasonably, and thoughtfully consider the price of being “right” versus “the price of peace” in instances in which you find yourself at a stalemate with your sellers.
It’s worth noting that there are indeed instances in which certain financial or legal considerations far exceed the price of peace (for example, material indemnity claims or material breaches of representations and warranties – see this blog for more on these and similar issues), so CEOs and their Boards must carefully weigh how to best proceed in each unique set of circumstances.
Sellers: Prepare for the Relationship to Fray
In spite of many people’s best intentions and efforts, history suggests that most transitions of this nature tend to not work out as originally envisioned (though of course there are exceptions). This is ultimately what happened in my own situation: Despite negotiating a two-year employment agreement with each of my two sellers, both had largely transitioned out of the business within 9-12 months, which was a mutual decision. In establishing a two-year employment agreement, I wanted to maximize the time during which knowledge transfer could occur, but I failed to appreciate the magnitude of the distraction and the emotional burden associated with trying to keep my sellers consistently placated. From the standpoint of the sellers, they also wanted to ensure a smooth transition for their employees and customers, but likely failed to realize how difficult it would be to watch somebody make changes to the company that they had spent the past 20 years building (they can hardly be blamed for this). If I could make this decision all over again, I would have pushed for a 1-year employment agreement post-close (at most), followed by a company renewal option. Whether or not the sellers would have actually agreed to this is of course impossible to say in isolation.
Where do you Start?
Taking over a brand-new business with little to no experience can be very overwhelming, and as a result, it’s often difficult to know where to start. Even after an incredibly exhaustive due diligence experience, it is almost certain that there is still an overwhelming amount of information that you don’t yet know about your own newly acquired company. Indeed, most new CEOs report that they learn more about their company in the first month of operations than they did in the six months of exhaustive due diligence that preceded it.
For this reason, in my opinion, it’s best to diagnose before you prescribe: That is, take the time to truly understand what the problems and opportunities are in the business before you start making definitive decisions around them.
One way that I did this was to schedule 1-on-1 meetings with every single employee in the company during my first two weeks on the job (indeed, this is the only thing that I did during my first two weeks). This accomplished a couple of things for me:
- It gave me an opportunity to introduce myself on a more personal level to each employee
- It gave them an opportunity to ask me questions, after the initial shock of the company’s sale had subsided (author’s note: even if nobody asks any questions at the town hall meeting during which the change in ownership is announced, trust me, everybody has questions, and most have worries)
- It provided me with a much more nuanced understanding of various company problems and opportunities to be acted upon – infinitely more nuanced than even the best due diligence process could have yielded
- Somewhere within the notes and observations that I collected over these first two weeks was a “To Do” list (that I could interface against the plans that I made during due diligence) that meaningfully informed my priorities within my first 1-6 months on the job
I’m not suggesting that holding these types of 1-on-1 meetings is the objectively “correct” thing to do in every instance – I’m simply sharing that it worked reasonably well for me.
The Power of Quick Wins
To generate some early momentum on which to build, I focused on garnering some easy and quick wins based on the lessons that I learned during my 1-on-1 meetings. For example, I regularly heard that employees wanted more of an opportunity to socialize with each other outside of work. Within a week, I booked a company-wide lunch event. I heard from one team in particular that the system that they were using was severely outdated, and was preventing them from doing their jobs with speed and accuracy. After verifying this information for myself, I tasked a Manager with finding a replacement system and having it implemented within 90 days. Our Office Manager (who sat by herself in the reception area) humbly mentioned that it would be nice to have a radio on while she was working, so I bought her one. Though these changes in and of themselves may sound insignificant in the grand scheme of things, they necessitated almost no time, money or effort, but provided me with a few quick wins, and provided the employees with tangible proof that I was indeed here to listen and to be helpful.
What About my 100-Day Plan?
I’ve been asked many times about the wisdom and usefulness of crafting a 100-day plan (prior to acquisition) to govern how to spend one’s time within the first 100 days after the closing of the acquisition. Here is my opinion:
In short, I think they can be useful, but with several caveats: On one hand, being thoughtful and deliberate and how and where to spend your time is rarely going to be a counterproductive exercise. Even if you don’t execute on the 100-day plan, simply going through the process of crafting it is likely to yield some useful insights.
On the other hand, however, as Mike Tyson once said: “Every boxer has a plan until he gets punched in the face”: Most 100-day plans crafted prior to an acquisition are based on an incomplete understanding of all of the relevant variables and dynamics both within and outside of the company, and as a result, blindly executing on such a plan could actually be counterproductive in some instances. For this reason, my opinion is that most 100-day plans are best left at a reasonably general level. Note that this assumes that you’ve joined a profitable, going concern company operating in “steady-state” (as opposed to a turnaround or workout situation, which often necessitate very detailed 100-day plans that need to be executed on quite carefully).
By way of a brief example: Suppose that a large part of your investment thesis revolves around the fact that the company hasn’t historically had an in-house sales team, and thus building one out will be a large driver of company growth going forward. In your 100-day plan, I wouldn’t suggest saying something like “Hire X new Account Executives within Y months”, as the sales process/infrastructure/training/onboarding may be so broken or non-existent that hiring somebody new would amount to setting them up for sure failure. Instead, I’d suggest something more general, like “Within the first 90 days, complete a full diagnosis of the risks and opportunities within the sales group, and craft a plan of action to be reported to the Board within 100 days after closing”.
Be Humble, Be Honest, and Let Your Actions do Your Talking
As the CEO, everybody in the company will now be carefully listening to what you say, but most importantly will be carefully watching what you do as their new leader. Instead of viewing this as a burden or cause for concern, I would instead suggest that this is a wonderful opportunity for any incoming CEO to begin to craft the culture and general disposition that they want to see for the company going forward. For example, if employees need to come in early or stay late for some reason, be right there with them, even if you can’t at all contribute to what’s actually being worked on. Instead of telling people that you’re there to listen and learn from them, show them by attending meetings, asking questions, and genuinely soliciting opinions. Instead of telling people that you’ll be governed by a sense of humility, show them by taking out the office trash can or replacing a lightbulb when necessary. In all of your words and actions, your guiding lights in your early days should generally be to:
- Listen more than you speak
- Diagnose before you prescribe
- Be honest about what you don’t yet know (your areas of ignorance will almost certainly be apparent to everybody anyways, so it’s best to be honest about them)
- Learn from others
Though it is almost always a good idea to have a measured, humble, “listen-first” approach to your first few months, it’s also important for new CEOs to realize that, generally speaking, problems don’t wait to present themselves until you’re ready to handle them. In my first week on the job, an employee came into my office and indirectly threatened to quit if he didn’t move to a more desirable desk. In my second week, it became clear that one of our teams couldn’t stand their manager, and wanted him gone as soon as possible. In my first month, our largest channel partner approached us about changing our long-standing agreement that was a key part of our investment thesis. Of course, I wasn’t ready to handle any of these situations. At this point, I barely knew where the bathrooms were.
Though there is no single formula for how to handle surprises like these, incoming CEOs should know that even in spite of their desire to do as little as possible within the first 6 months, they’re joining an active business with real customers, employees, suppliers, problems, opportunities and bottlenecks. This is another reason why establishing and maintaining a constructive relationship with the seller is in the buyer’s best interest, as they can help you navigate these first few months, during which problems and opportunities that you’re not yet ready to address will almost certainly present themselves.
Communication with External Stakeholders
One of the questions that I’m asked most frequently is if, how, or when to communicate the change in ownership to key external stakeholders (most often customers). Though there is no objectively correct way to do this, as a general rule I believe that the extent of your communication should be roughly commensurate with the importance of the stakeholder in question: For example, if you have a single customer that represents 30% of revenue, then it’s likely in your best interest to get in touch with this customer early and intimately (ideally it would be before the transaction even closes). If you have hundreds of customers and none of them represent more than, say, 5% of sales, then you can likely get away with very light-touch communication (for example: A stock email sent to all customers), or perhaps even no communication at all. In my case, I had a highly diversified customer base (none represented more than 5% of sales), and as a result I chose to reach out to all customers with a stock email ~3 months after I had assumed the CEO role. My logic here was that customers would already be in possession of 3 months’ worth of tangible proof that their lives wouldn’t be negatively impacted under the new ownership group. To my surprise at the time, I didn’t get a single response or instance of pushback from any customer. As long as our software continued to work successfully for them, they didn’t appear to care all that much that the company had been sold.
To illustrate the opposite point: My company had a highly strategic relationship with a channel partner, who had been providing us with ~75 new customer acquisitions per year for the preceding 5 years. In this case, the relationship was so important to the business that I made a conversation between myself and their CEO a condition precedent (or “CP”) to the deal closing (i.e. the purchase would not close until I had an opportunity to speak to their CEO, and if I wasn’t satisfied with the content of that discussion, I could kill the deal entirely).
Ultimately, you will have to decide if, how, and when to communicate the change in ownership to each key external stakeholder, but based on my experience, I’d again suggest that you make the extent of your communication roughly commensurate with the “importance” of the stakeholder in question. Sometimes, detailed and intimate communication is essential, and other times it creates problems that didn’t need to be created in the first place.
Don’t Neglect Self Care
The intensity of assuming a CEO role with minimal experience is one thing. It’s another thing entirely to do this immediately after purchasing a company, which itself often necessitates a highly intensive effort spanning dozens of different disciplines and 6-12 months (or more) of time. Though every cell in your body is likely to tell you to devote 100% of your waking hours to your newly acquired business, I would humbly suggest that this period is the period in which you must begin to establish (and eventually maintain) self-care rituals and practices that will help you get through your first 6-12 months in a healthy and sustainable way. I didn’t do this, and within my first month at the company, my body had had enough: I developed a case of pneumonia so bad that I was completely bed-ridden for almost two weeks. Another CEO with whom I recently spoke collapsed in a meeting room within his first month on the job, ending up in a hospital for a prolonged period of time. Though extreme cases like these may not necessarily be the norm, they are, at the very least, cautionary tales of what can happen if you ignore balance in your life for too long. Whatever it is that provides you with a sense of rest, rejuvenation, and/or relaxation, you must schedule these into your calendar, even during these highly intense early days. Building a business is a marathon and not a sprint, and you’d be wise to act accordingly.
If You’re Interested in Learning More:
You can check out the video below, which is a recording of a live presentation given to a group of acquisition entrepreneurs (via searchfunder.com) in April, 2022. It includes much of the content above, but also includes ~30 minutes of live Q&A.
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