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Betsy Kauffman has come close to buying companies more than once. In one attempt, the business was doing well when her side found it. Then its revenue started to decline, the valuation came down with it, and the sellers, unhappy with the new number, backed out. Had the deal happened a year or two earlier, she says, the valuation would have held and the founders would have got the money they wanted.
On Episode 321 of The Exit, host Steve McGarry talks with Kauffman, founder and CEO of Cross Impact, an executive leadership coaching firm, about the part of exit preparation owners tend to underestimate: the leadership team. They cover reducing founder dependency, deciding who to tell about an LOI, when to sell, and why deals fall apart late.
Buyers look at who is driving the business
Kauffman started out as a technology project manager. After she spoke at a conference about building high-performing global teams, a peer told her to quit her day job, and she left a secure role at a large organization to start her own firm. Her work shifted from frontline teams to leadership teams when senior leaders kept asking her to help them become more aligned.
She sees many leadership teams assembled for subject expertise, such as a strong CFO, HR lead or technologist, without much thought about how those people will work together. Her name for the missing piece is a leadership operating system: how the team communicates, collaborates, makes decisions, stays focused on strategy, executes and adapts.
That matters in a sale, she argues, because one of the first things a buyer looks at is who is leading the business and how well they work together. A strong team helps a buyer judge how hands-on it will need to be with day-to-day operations, or whether it can trust the team to keep moving the company forward.
Could the company run for a month without the founder?
Kauffman’s main preparation point is founder dependency, and she is working through it herself. She and her husband have a company they are looking to exit in the next few years, and he is critical to every part of its operations. Their aim is to find the right people so he can step out of the day-to-day, and so that if he left for a week, two weeks or a month, the company would still run.
McGarry calls founder dependency, or key-person risk, probably the number one issue he has experienced, and says everyone he knows who has gone through an exit or even a fundraise has run into it. In his introduction to the episode, he suggests that reducing it can take two or three years.
Who to tell about the LOI
McGarry describes the period after signing a letter of intent as lonely: tell too many people and you risk distracting or demotivating the team. Kauffman’s answer is to bring in only the people who will be critical to the transition and whom the buyer plans to keep, such as a COO. They will have buy-in, she says, and can make or break the sale. People further down the organization are better left out at that stage, because the uncertainty can cause anxiety and even departures.
She has seen the alternative. One company she worked with brought its entire team in while an LOI was in place, and the deal fell apart at the very end. A team that keeps being paraded in front of potential buyers, she says, starts asking whether it should stay or leave.
For the inner circle, she recommends being open that the deal could fall apart, even the day before signing. Founders might also ask the people who will stay to meet potential buyers and judge whether they could work with them. And she suggests putting the question to buyers directly: “What are your intentions with my people?” Where key leaders are critical, she suggests telling the buyer it should keep them in place for at least a year. She describes one acquisition where the executives were told they were safe for at least a year, along with which roles, such as CFO, might change.
Why she says to sell at your height
Asked when to sell, Kauffman says it is when you are at your height, even though that is hard for founders who wonder why they would sell a company that is performing. “I say sell when you’re doing phenomenally well,” she says, adding that you will probably get top dollar. Her failed acquisition shows the other side. A business with falling revenue, debt, or gaps in operations and leadership is harder to sell, she says, unless a competitor or a buyer willing to put in a lot of elbow grease wants it.
McGarry agrees that the signal is when things are trending upward and the team can run without you, while admitting it feels counterintuitive. He adds that businesses do slow down, whatever the graph looks like today.
The honest conversation that came too late
Kauffman’s biggest lesson comes from the buyer’s side. In one of her side’s first acquisition attempts, talks went on for about 11 months. The target’s revenue came in lower than projected, but neither side addressed it directly. The sellers kept asking how the deal would be funded and got vague answers about some debt and some equity.
In hindsight, she says, explaining the funding plan and that it depended on the company hitting its numbers could have allowed the terms to be renegotiated when sales fell short of the projections behind the valuation and LOI. She calls not being forthcoming on the financial side probably the biggest mistake. Deals do collapse, she says, but “I would rather it collapse earlier,” before either side has spent as much on attorneys and accountants.
Keeping people motivated after the deal
For buyers, Kauffman suggests asking the people who help run the business what they would do differently, sharing the plan for the company and giving them a reason to stay, whether through bonuses, commission, equity or an ESOP. Her advice to her younger self is to learn as much as possible about acquisitions and sales, a world she says she entered only about three to five years ago.
Kauffman offers a leadership alignment survey at crossimpact.co, and her book, The Fix: A Business Fable for When Your People Aren’t Broken, But Your System Is, is available on Amazon. You can also find her on LinkedIn.
