Get aligned with your co-founder before you sell

The Letter of Intent lands in Peter's inbox. He's the CEO and 40% owner of a marketing agency. After discussing a sale with a potential buyer for a few months, and he's finally got them to this stage. The offer... £12m.

He's delighted. His share (almost £5m before taxes) is enough to set his young family up for life. He knows he needs to 'play it cool' with the buyer, but would accept that offer on the spot.

It's late, but he calls his co-Founder Henry. He runs him through the key points of the offer. Henry laughs nervously.

"Urgh, that's a filthy low-ball. We'll have to tell them that they are nowhere near. Right?"

It's surprisingly common for co-founders of businesses to be completely and hopelessly misaligned during a sale. It's one of the top 5 reasons that deals die.

Why does it happen? One of them doesn't actually want to sell, or they have very different ideas of what price the business should sell for. That causes friction during negotiations, perhaps spooking the buyer or just leading things to fall part.

Let's understand why it commonly happens, and what you can do to make sure it doesn't happen to you.

Different personal situations

In The Time is Right: When to sell your company, we explored a framework for evaluating when is the right time to sell.

Many of the most important factors are personal. These are the most common areas where business owners' interests or expectations become deeply mis-aligned.

That might be because:

• You are at different life stages. Maybe one has kids, and wants to sell to spend more time with them whilst they are young, whilst the other doesn't.
• You have different levels of personal wealth outside the company. The one with a lower net worth will be more inclined to sell and cash in their chips.
• You have different levels of motivation and energy for running the business. If one wants to cash out whilst the other wants to 'go long' that's a hard conflict.

These factors are the hardest to reconcile. An honest conversation will help, but it won't change your life stage or net worth. See the final section below for some helpful tactics though...

Valuation expectations

I've seen situations where co-Founders are 5x apart on valuation. Like with Peter and Henry, one person's dream offer is derisory to the other.

Valuation is not an exact science – it can be more guesswork than anything – so it's easy for expectations to drift really far apart.

Issues on valuation are more common when ownership levels are not equal. If one partner owns fewer shares than the other, they will obviously need a higher exit price to get the same payout. That can lead to misaligned expectations.

Confidence

Partners can have different levels of confidence in the future of the business and their industry. One of you is bullish and wants to stay in for the long-term, the other wants to sell now.

How can that happen if you're both looking at the same data?

It often comes down to levels of optimism around a big future strategy, that's risky but would pay off big if it succeeded. Like launching a new product, or opening in a new market.

Post-sale plans

Buyers will often want founders to stay in the business post-sale for a handover period, and will try to tie the price to performance during that period. This is called an Earnout.

This can again be a source of misalignment. One might founder want a 'clean break' to work on other projects, and so would reject a deal with an Earnout (or accept a lower price to avoid one). Whilst the other might be happy staying in the business post-sale and back themselves to hit good performance during an Earnout.

Solutions

Depending on the issue, it may be possible to fix this with a deal structure.

If one seller wants to cash-out but the other wants to play the long game, you could structure a partial sale. One founder sells 100% of their shares, walks away and maximises their cash on closing. The other can retain a portion of equity, keep working in the business and keep some upside.

If it comes down to straight valuation, or one party just not wanting to sell at all, a fancy structure won't help. You will need to have an honest conversation where you set out your expectations and boundaries for doing a deal.

These factors tend to be intertwined, where a mixture of personal and financial factors, plans for the future and views on the market all come together into a strong desire to sell or accept a different valuation.

Having a clear and honest conversation can help you to unpick these issues and see if you can find common ground.

Your private LOI

Here's an idea to structure this conversation...

Each write your own "Letter of Intent" for a deal you would be happy to accept.

Do this early in the sale process, as soon as you think it's likely that one of you wants to explore a sale.

You don't need all of the legalese and non-essential bits, but it will force you to think about:

• The minimum cash payment you expect
• How much you want to receive on closing, and how much you would accept as deferred or contingent payments
• If you would accept shares as payment
• If you would sell only a minority stake, or if you want a 100% exit
• Whether you would stay in the business for a few years
• Any other non negotiables, whatever they might be.

You can then swap documents with your partner, and see how aligned or mis-aligned you actually are. You can then review the areas where your 'terms' are difficult, and see if you can work to a compromise.