Sellers can get deal fatigue, and sometimes after only a short period of time. With diligence extending longer and longer in what many consider to be an uncertain economic environment, keeping sellers committed can be tricky, says Tonka Bay Equity Partners Partner Shane Slominski.
However, he says the pendulum has swung back to be more balanced.
“I think we're back to more normal, pre-pandemic timeline due diligence processes,” Slominski said at last year’s Minneapolis Smart Business Dealmakers Conference. “And the way we manage that with owners who are typically entrepreneurs or founders who have a limited team, limited resources on their bench, is it's easier for them to stage things. So yes, it may be is a prolonged timeline so it goes on longer, but a lot of times due diligence is flowing through one individual. And if you try to cram everything into a 30-day period or something like that, that person is going to get tipped over. It's actually better for everybody if you can stage things appropriately and not stack everything up on top of each other. We try to manage it that way. And also, we think it's really important to set expectations up front in terms of what the process is going to look like, what stage of diligence is going to happen first, so that you can manage that fatigue.”
Building trust and rapport with sellers, he says, is very important, and it's where they spend the most time. But it goes both ways.
“We want to build trust and rapport with them, and vice versa,” he says. “And that starts for us with the very first meeting because we want to make sure there's a mutual fit. And it probably goes back to even before the first meeting, in terms of how we got introduced. Usually somebody introduces us because they think there's a good mutual fit and similar values and similar ways about going about business. So, we spent a lot of time building that relationship.”
Another factor is that for the owner, the employees and their customers are their lifeblood. That can lead to hesitations about talking to them about the transaction and teeing up an introduction to a potential buyer.
“We usually try to talk about it not in terms of selling the business, because that's usually the scary part. This is their baby. Their employees are like their children. And the idea of selling their business can be a scary concept,” Slominski says. “So, we usually try to first build trust, but then talk about it more as bringing on a partner. And it's more of a partnership approach where you're not selling the business, you're bringing on a partner and an investor that's going to bring resources to the table that are going to help the business to continue to grow. Oftentimes, the business owner has a continued ownership stake in the company and so that's not just a story, that's really the facts that they're bringing on a partner. When owners think about it that way, they're usually more receptive to having discussions with their employees. Customers is a little bit trickier. That's a sensitive topic. And usually, we have to stage that throughout the diligence process when there's more certainty to close.”
Trust is also crucial to the post-deal integration. Much of getting that right is establishing trust and making sure there's a good cultural fit before close. Then, he says, the sides are better prepared to put together the integration plan and what happens post-closing.
“The way we handle it is spend a lot of time in due diligence talking about what's going to change post-close,” he says. “And the reality is we're investing in good businesses that are established that have been around for a while. So, we really don't want to change what's been working. And so, a lot of the discussion is, we're not going to get in the way and screw it up. We're hoping to bring resources to bear that are going to help to accelerate a lot of the initiatives that you might not be tackling on your own.”
He says one area they spend a lot of time talking about is pace. There are probably many things that they're going to encourage the company to move a little bit faster on. Oftentimes, the management team is yearning for that. And they may have been held back a little bit by their current ownership structure and its appetite for taking on a risk.
He says in one deal, the three owners who started the business were not active in the company, but had a very professional CEO running the business who wanted to conquer the world. The CEO had a lot of initiatives that she wanted to pursue, but didn't have the capital, resources or the buy-in from the ownership group to tackle them. So, he says they spent a lot of time talking about that, what resources were needed, and how they could do as much as they can as quickly as they can. After closing the deal, they started looking for acquisition opportunities and closed three acquisitions in 24 months.
“I think it's all about having those discussions in pre-closing about what are we going to do post-close, and probably increasing the pace of activity relative to what was happening before the deal closed,” he says.
