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Corp. Development, Family Offices, Private Equity

3 Characteristics of a Compelling Business Offer (Other Than Price)

A typical entrepreneur spends countless hours and invests considerable emotional capital into building a successful company.

So when it comes time to sell their business, they aren’t simply looking for the buyer with the deepest pockets – they want to partner with someone who has concern for the business, respect for the seller and a long-term plan.

As a buyer, the key to creating persuasive deals is to consider, first and foremost, what the seller needs and how you can provide it. Through my work as an investment banker, I’ve advised entrepreneurs who are contemplating the sale of their businesses. I’ve found that the most attractive offers from buyers go beyond a simple dollar figure.

In his book Drive, author Daniel Pink posits that three characteristics — autonomy, mastery and purpose — can increase performance and satisfaction among employees, ultimately inspiring motivation. I would argue that those characteristics are just as true for business owners.

Let’s look at how those three characteristics factor into compelling business deals:

  • Autonomy: The desire to be self-directed. As owner of a company, the seller is accustomed to having a high level of autonomy. If you’re trying to buy that person’s company, consider what you can do to give the owner some degree of autonomy in the future. This can come through a dollar amount that guarantees the seller financial security — which in turn gives them the flexibility to decide the future course of their life.
  • Mastery: Comprehensive knowledge and skill. Successful businesses can take years to build, with the owner undoubtedly learning many hard lessons along the way. As a buyer, you can communicate your respect of that mastery by offering the buyer the opportunity for continued involvement in a way that makes use of their wisdom and experience. Entrepreneurs often derive a certain amount of personal pride out of being the head of their company. So, your offer should satisfy that desire to receive recognition and respect by giving the owner the option of continuing on in a visible role.
  • Purpose: The desire to do something with meaning. By buying a person’s business, you’re potentially removing him from a place where he uses his skills to provide value to the world (in addition to making money). You’re also changing his role in a work community that he feels connected to. So, it’s important to consider how your deal can appeal to the entrepreneur’s sense of purpose. One way of addressing this need is to offer a thoughtfully designed earnout provision or consulting role, in which the owner continues on at the business for a set length of time and helps it reach certain specific goals. If you do this, make sure to offer them a great degree of flexibility, so that they’re able to pursue personal passions or business ideas that will begin to fill that sense of purpose.

Let’s look at an example to better understand how these characteristics play into middle-market deals. Doctors’ practices are good examples of small, entrepreneurial businesses whose principals have strong senses of autonomy, mastery and purpose. Dr. Smith and her partners have owned a private medical practice together for 30 years. They have a staff of 30 employees, some who have worked for them for 20 years. She and her partners have just been approached by two buyers, both larger practice groups, and they believe it could be time to sell their business.

Buyer A offers each partner $5 million with a two-year earnout. The offer does not clearly promise jobs to current employees and spends no time speaking to Dr. Smith’s need for belonging. Dr. Smith’s community standing will obviously decrease because she is going from a business owner to an employee, but Buyer A does not address this concern. Dr. Smith values her autonomy as an ongoing partner in the practice more than putting the equivalent amount of money she might earn in the future as a partner into her pocket today, but because Buyer A hasn’t taken the time to understand this, they do not address Dr. Smith’s ability to exercise autonomy after the deal.

Buyer B offers each partner $4 million with a two-year earnout, while also allowing Dr. Smith to remain a partner in the practice and assuring her that her opinion will be valued during those two years. They emphasize the need for Dr. Smith’s knowledge during the earnout period as they transition the firm, but also note that she will have increased flexibility during that time. In addition, Buyer B promises that all of Dr. Smith’s employees will be offered positions prior to hiring new employees. The buyer has a great reputation among the community and intentionally recognizes and appreciates Dr. Smith’s mastery of her skill.

It’s pretty clear which is more appealing – even though it’s 20 percent lower in monetary value, Buyer B clearly covers the entire scope in their offer.

The next time you’re constructing a deal, remember the business owner’s basic human needs and use them to offer more than just a checkbook.

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