M&A Secrets Revealed: Understanding the Psychological Impacts Behind Business Sales
Some years ago, I was involved in a merger between a Catholic hospital and a large, secular, public hospital. This was a sensitive deal, involving a religious order transitioning to co-ownership of a hospital that had been in its care for decades. The merger took a long time to develop, and there were many misunderstandings that had to be resolved along the way. Numerous compromises were made on both sides of the table. Over time, much goodwill and trust had been built up by all involved. Yet, on the very first day under this new system, things went south when the new CEO went room by room with a claw hammer, ripping crucifixes from the walls.
You hear about businesses being sold all the time – and while some are headline worthy, most are the ones we either experience ourselves, or hear about from a friend or colleague. It’s exciting to hear about the money involved and who did the acquiring. Business sales are indeed dynamic, but you don’t often hear about the deals that didn’t happen. The ones where someone hit the eject button and stopped everything. If you do learn about those ill-fated deals, you’ll often find a deeply personal reason. Maybe it was an owner who just wasn’t ready to let go, or a partner who was worried about the inevitable changes that would result after the ink dried on the contract.
There are numerous reasons that M&A deals can end up not going anywhere. Let’s look at some of the common psychological factors found in selling a business.
Preparing for Ownership Changes
“Psychological factors”? You bet. It’s easy to think of yourself as a stone-cold capitalist selling off your business for a big payday. But are you thinking about the years you’ve put into it? How often did you stay up at night worrying over making payroll in those early years? How about the work that went into chasing customers? What about the people who were with you at the beginning, some of whom are still at your side today? Now imagine a generous offer for your business from a competitor or large entity on an acquisition spree. Logic dictates that you take the offer and pat yourself on the back. Could you do it? Let’s assume you had no pressing need to divest yourself of the business—could you do it without thinking twice about it or…would your emotions kick in? Would you feel resentment watching another entity take the keys to the business?
The point is that business owners need to prepare themselves psychologically for the sale of their business. The stress alone is going to be significant, particularly if they are trying to do it themselves. Without trusted advisors who can help and a plan for the transition, the whole process is going to be a struggle. In addition, it’s not uncommon for deals to fall apart during due diligence, simply because a seller didn’t want to disclose something unfavorable about the business. While hiding a blemish on something you’re selling is not unusual, it’s not surprising that a business owner is going to find it hard to admit that their “baby” isn’t perfect.
Team Dynamics and Change Management
Another important aspect of a business sale is the management team running the company. A solid, collaborative team that works well together can be a major selling point. This cohesive unit shows stability, the potential for growth, and a well-functioning operation. On the flip side, team tensions or conflicts can raise “red flags” for potential buyers, impacting the perceived value. Investors often look at how united the team is as having a direct correlation to the potential for ongoing success post-sale.
Care needs to be taken to make sure that the human systems in the company come through the sale of the business in a seamless manner. To do this, it is important for team members to learn about the impending sale as early as possible from the senior management team to avoid unpleasant surprises, should news about the sale leak before this communication. It would also be wise to brief the entire management team in the company ahead of a general announcement, so that they can answer the inevitable questions that will be voiced afterwards. Uncertainty about the future will be what causes valued team members to start looking elsewhere for employment. Setting their minds at ease in this regard is going to be a key part of the retention effort.
Preserving Value Through Cultural Retention
Buying a company is not just about acquiring tangible assets and client lists. It’s also about inheriting what in many cases is a unique, valuable company culture: the shared values, beliefs, attitudes, and behaviors that define how things get done within an organization. It's the "personality" of a company that shapes its work environment, team member interactions, and overall identity. The possibility of coming changes to the company’s culture as the result of a sale is a concern for the team members involved, as well as for its managers. This fear has the potential to be disruptive to the company’s teams, and further exacerbate the retention problem.
To hold onto a company’s cultural identity and values during the transition, there are several steps to take. First, it will be vital to identify those key values that the company does not want to lose. This means calling out these values and making sure that everyone knows what they are, and why they are so critical. Second, these values and other key characteristics of the culture need to be shared with the potential new owners so that they understand their importance to the well-being of the business. Third, involving an organizational psychologist to do a “cultural due diligence” audit of the buyer and the seller is a good way to consider how to integrate the cultures of the two companies. An audit like this can also predict where the companies are likely to find friction in the future.
Leveraging Organizational Psychology for Enhanced Value
While those three steps will help preserve company culture, there are several principles common to the practice of organizational psychology that can also be of benefit to M&A deals. For instance, team dynamics in the management team can be tuned to enable better working relationships, which will become apparent to anyone evaluating their effectiveness. There are also different change management techniques that can be employed to help with the transition that can make sure that the workforce is adaptable and flexible enough for what is to come following the sale. Moreover, leadership development activities will strengthen the current team in place, and can be used to demonstrate strong bench strength to potential buyers.
In the complex landscape of mergers and acquisitions, the psychological groundwork for selling a business is often overlooked. Yet, it's the unspoken factors—the emotional ties, the human dynamics, and the cultural fabric—that can either smooth the path to a successful sale or become stumbling blocks leading to a deal's demise. Preparing oneself psychologically for such a significant step is more than advisable, it's essential. Business transactions may hinge on numbers and contracts, but it's the intangible elements—the resilience of the management team, the cohesion of the company culture, and the adaptability of its workforce—that truly bolster a business's worth.
About the series:
Mergers and acquisitions (M&A) are complex processes that often involve a myriad of legal, financial, and operational considerations. However, one often overlooked aspect of these transactions is the psychological impact on the individuals involved on both the acquiring company’s side and the company being acquired. Knowing these psychological factors can have a significant impact on the success or failure of the deal, this series aims to equip readers with insights to navigate the complex terrain of M&A with strategic foresight and resilience. The rest of our M&A blog series can be found here.
Article contributed by Dr. Gary Kustis
