by Margaret Heffernan - Friday, 7th September 2007 -

Five million. Ten million. He’d seen competitors sell for as much. He’d always been impressed by the numbers but he’d never really wanted to sell.

But still, those numbers were enticing. They entered his mind and stayed there.

Years later, after a few good quarters, John decided that the time had come to sell. To grow the company further required a cash injection.

At a conference, he ran into the perfect buyer: someone he’d known for years whose own business had just been acquired, leaving him with a large war chest for expansion.

They did the deal on the napkin. Mentally, John became a millionaire.

Which was when the trouble started. When John told his senior managers about the deal, they all started to sniff money, too.

How much would they get? Who would get the most? Some wanted cash, others stock. Many merely worried about their jobs.

And then due diligence began. Every uncrossed “t” and undotted “i” became a liability. Business plans had to be dusted off and five-year projections brought up to date. All anyone could think of was the money they might realise.

As the months dragged on, camaraderie crumbled. Revenue started to dry up. Everyone was so focused on the sale that they forgot about sales.

The acquiring company took its time. No one else competed to buy the business. And the more it learnt, the lower its price went.

The final offer would make no one a millionaire, and was rejected with a combination of sadness and defiance. But when management turned back to their business, they confronted a cash crisis. They’d taken their eye off the ball for too long.

Nothing about acquisitions is ever simple. To begin with, many offers are just trawling exercises.

The best way to find out about your competition is to offer to buy them. Their response will tell you a lot. Are they keen to sell? How confident are they? Are there many people in the business they care about? How important is money?

Big companies have learnt this and practise it relentlessly. When I ran technology companies, several large West Coast software companies were notorious for inviting start-ups to visit them and explain their technology.

Naive engineers, flattered by the attention, would delight in explaining everything they had done and everything they planned to do. It was only later that they saw how comprehensively their minds had been raided.

But perhaps the biggest risk with acquisitions is opportunity cost. Once you take an offer seriously, you will be amazed how profoundly it distracts everyone.

Greed and fear play an active role in taking minds away from the daily task of making money. Team loyalties built up over years break down in weeks.

Several entrepreneurs I know have chosen to keep their company sale secret until the deal is done. Others are ruthless in rejecting all but the most convincing suitors.

Over time, every entrepreneur learns to consider each approach cynically, assume the deal won’t happen and play hard to get. If the acquiring company is serious, and the target company keeps focused on building sales, the price can only rise.

As for John, he is still looking for someone to buy his business. But he’s learnt the hard way that however many times people tell him his company is worth millions, it is worth nothing until someone pays for it.