A child’s riddle: Five frogs are sitting on a log. Four decide to jump off. How many are left? Answer: Five. Why? Because deciding and doing are not the same thing.
That riddle is the intro to a mergers-and-acquisitions book called Five Frogs on a Log. The book, for serial entrepreneur Brian Twibell, is a well-worn bible. Twibell is the CEO of RedVision, a $51 million provider of real estate title searches based in Parsipanny, NJ. Since cofounding the company in 2001, Twibell has led it through four acquisitions, helping it grow to 517 employees — up from 72 in 2007.
How Five Frogs has helped Twibell, we’ll explain in a minute. First, let’s spell out how this riddle — about the visible gap between deciding and doing — applies to the current M&A climate and the year ahead.
The Visible Gap Between Deciding and Doing
By all counts, there’s cash aplenty for deals. The problem?
“A big disparity in value expectations between seller and buyer, and a huge amount of idle private equity,” says M&A expert Kenneth J. Sanginario, who has more than 25 years of experience as a consultant and advisor in the midmarket.
The result is a high rate of failed deals. In 2013, 30 percent of brokered deals and 31 percent of investment bank deals fell through after a Letter of Intent was signed, according to research from Pepperdine University’s Graziadio School of Business and Management.
The biggest factor in the aborted deals was a valuation gap in pricing. The second-biggest was non-fiscal demands deemed “unreasonable” by the buyer or seller. (In years past, economic uncertainty and a lack of capital were larger factors.) Craig R. Everett, the professor who led this research, says that unreasonable demands include certain employment contracts, disputes over perquisites (personal vehicle, club memberships), and disagreements over the future direction of company.
The Blind Spot of Entrepreneurs
Here’s where the gap between deciding and doing comes in.
For personal reasons, an entrepreneur may decide the time is right to sell his business (or acquire another one). But actually doing it — when he realizes his company is worth less than he thought it was (or that the to-be-acquired company has unrealistic demands) — is another story.
While some of this has to do with the current market in which buyers are calling the shots, much of it stems from the emotional taproot of entrepreneurship itself. First-time founders — by virtue of who they are and the emotions they generally possess — tend to overvalue their companies and have unreasonable demands for their would-be acquirers.
“The entrepreneur’s bias will be toward overvaluation,” notes Everett. “They are very optimistic about their growth prospects and somewhat blind to the risks of their business.”
In addition to overvaluation, many entrepreneurs who think they’re ready to sell do not anticipate the emotional pain of their brand disappearing. And that’s just one of many sensitivities that founders need to navigate, notes Diane Niederman of the Alliance of Merger & Acquisition Advisors (AM&AA).
“We had a $97-million deal die at the table because a business owner’s new wife was whispering to him about a stepson who needed a job,” she says.
Mastering the Transitions
With the help of Five Frogs, Twibell has developed a blueprint that helps RedVision — and the companies it acquires — address some of the thornier emotional transitions of the acquisitions process.
For example, Twibell emphasizes the delivery of two key fiscal goals in the first 90 days after a deal closes. He wants everyone to know those goals before the deal is done. The sooner the to-be-acquired company knows them, the sooner it can accept and embrace them as joint goals, rather than as RedVision initiatives they’ve inherited. Likewise, in the first 90 days after a deal, RedVision allows the acquired company to keep its brand name in e-mail signatures and on web sites, with the addendum A division of RedVision.
“But on the 91st day, their brand is gone,” he says. “We keep their brand long enough so their clients don’t get spooked.”
This three-month transition also allows anyone at the acquired company who might be emotional about the brand — say, the founder or longtime employees — to get acclimated to the new reality. That is no small thing.
Action Steps for Would-Be Buyers and Sellers
So, what is to be done? If, like Twibell, you’re looking to acquire other companies, preparation is essential. Just because you have the cash — and a lust to grow fast — doesn’t mean you make the deal.
“For companies on the buy side, if they have weak infrastructures, an acquisition could cause both companies to fail,” warns Sanginario.
If you’re looking to sell, assess if you (and your family) are emotionally ready. And remember: Even if you’re ready, that doesn’t mean your business is. Prepare your books and systems for the scrutiny of the due diligence process as soon as you can. That will give you more time to adjust to the icy truth of your valuation.
Better still, you’ll learn how to improve that valuation. Another quote from Five Frogs, a quip from writer Damon Runyon, sums it up: “The race is not always to the swift, nor the battle to the strong — but that’s the way to bet.”