Selling the Company? How Relaxing Control During the Sales Process Can Increase Value
January 02, 2017
Case categories include: Ethics Leadership M&A Strategy & Planning
RMC Water and Environment was founded in 1998 by three senior vice presidents from a large international consulting firm who wanted to focus on water issues in the Bay Area. The company grew to 125 people, all based in California, and developed a phenomenal company culture that embodied collaborative and focused teamwork. The founders, who dearly valued this strong, independent culture, were looking to retire and cash out their majority stakes. Not wanting to damage the cultural chemistry, they started down the path of an Employee Stock Ownership Program (ESOP) in which employees would take ownership through a debt transaction using profits over time to pay back the retiring shareholders.
“One downside of the ESOP transaction is that it would have required a significant annual payback over an extended period of time,” explains Alyson Watson, who was President of RMC at the time. “The whole reason for considering an ESOP was to maintain our culture, but when you are so constrained in how profit can be used, you can’t reinvest in growth or in your people. So, it appeared that an ESOP would not protect the culture as we had hoped.”
RMC management then considered other options like private equity and outside sale. After retaining an advisor and executing a nationwide search for buyers, RMC received multiple offers for purchase. While the response was phenomenal, there was an issue of internal optics. Because RMC had a seven-member Board, all internal and comprised of major shareholders, a decision to sell to an outside partner risked looking like a “lining of the pockets” and a relinquishment of the company’s culture.
“Once we had offers in, I worked with the Board to prioritize and narrow down to a short list of candidate firms. At that point it became tricky because in order to preserve the company culture, the decision really had to come from our staff, or the sale would not be truly successful,” Alyson describes. “There was definitely some hesitation on the part of the Board to bring in the management team. News of a potential sale might have caused concern, possibly triggering resignations. Still, I was able to convince to Board to brief our management team and send them on the road to meet with the short-listed firms.”
“The management was a minor shareholder at less than 1%,” Alyson continues. “So, in a larger sense, they represented the future of the company instead of its ownership. These folks went out and met with each of the potential buyers at their offices for a couple of days to get a sense of each company’s culture. It was a huge sign of trust on the part of our Board – a feat of relinquishing control at a critical moment.”
Management returned from these visits not only unanimously wanting to sell, but they were especially excited to sell to one particular company. The Board took that recommendation and the company sale was executed in short order. The integration so far is going exceedingly well with no wage reductions, no staff layoffs and an enhancement, even, of the company culture. This success, attributes Alyson, is due in large part to the way the sale was done: having the management team completely invested and making the ultimate decision that, not only should RMC sell to a particular firm, but they should sell because it was culturally a better option than an ESOP.
“What I heard from the companies we visited in the sales process was that sending the management team and not the Board was extremely meaningful. The buyer obviously understood that the sale might have indicated the retirement of some of the senior leadership. The fact that the Board sent management without going themselves spoke volumes of RMC having strong second-generation leadership in place. This made they buyer more comfortable and increased our value in their eyes. Of course, their thinking went, they could count on this second-generation leadership if RMC’s Board entrusted them so fully during the sales process!”
There is a fear factor, of course, when major shareholders relinquish control. Yet, it was through the Alliance of Chief Executives that Alyson was encouraged to recommend this particular path. A member of her group explained that having his managers involved in the sale of his company was hugely beneficial. Using her Alliance group member’s experience as a case example, Alyson was able to more convincingly sell the idea to RMC’s Board and its shareholders. The final result was not just a financial transaction, but the arrival at a home where RMC’s exemplary staff is truly comfortable and actually realize the value of the buying company.