Selling “In” Instead of “Out”

Several years ago, I sold my company to a $4-billion HMO. My business, Execu-Fit Health Programs, became a subsidiary of the HMO, and I signed a five-year management contract as part of the deal.

After going through all the usual trials and tribulations of entrepreneuring, I thought that anyone could make it through another five years (and I did). It had been difficult running my business while negotiating with three potential buyers, and then merging it into a very large organization. But I learned some hard-earned lessons:

  • Pick a reputable acquirer. Sell only to a reputable organization on which you have done reverse due diligence. The HMO was a solid company with excellent financial resources. If it had been otherewise, I could have seen my efforts go down the drain.
  • Lay down a solid floor. Negotiate a “floor” so that no matter what happens in the first few years of your contract, you are paid enough money to keep you happy and satisfied.
  • Make sure there’s an upside. Negotiate extensive upside potential. I negotiated a 12.5 percent annual buyout bonus if I met my business goals and was granted stock options in the new parent company.
  • Be realistic about financial goals. Set your business goals in the purchase agreement conservatively, not like many overly optimistic entrepreneurs who tend to set goals that are often out of reach. I met all my annual goals and received the annual buyout bonuses.
  • Trust yourself as well as others. Many people advised me to hire an investment banker to lead the acquisition process. I chose to lead an experienced team myself and trust my instincts. However, I also gathered advice from qualified professionals along the way.
  • Don’t hide anything. Be brutally honest in the warrants and covenants section of the purchase agreement. This is the section where you tell the potential buyer about any potential future problem (pending lawsuits or malpractice suits, possible loss of specific clients, etc.), which protects you from future disagreements with your parent company. I included a warrant and covenant about the possibility that my largest client might terminate its wellness contract upon finding out about the acquisition. The client did fire Execu-Fit because they did not want to receive wellness services from an HMO. Since this threat was thoroughly outlined in the agreement, there were no repercussions to me from the parent company.
  • Get help from peers and mentors. Draw on the experience of fellow entrepreneurs who have sold their companies. My membership in YEO and the advice from fellow members was invaluable. Gain help from someone you trust who also has an excellent business instinct or extensive experience.
  • Negotiate your reporting relationship. Report as high up as possible, to the first or second level of the parent organization. I would never have made it through the management contract if I had reported to middle management. Top executives are usually too busy to micro-manage and are usually interested in the acquisition company meeting its goals and objectives. Additionally, try to report to executives whom you admire and respect.

Adapted from The Bridge, September 1996.

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