Sale of a Private Company – Management Conflict of Interest

By Anthony Tolomizenko, BSc, CPA, MBA

Managing Partner Northern Mergers & Acquisitions Corporation

Entrepreneurs often spend a good part of their lives building their businesses from the ground up. As these businesses grow, entrepreneurs hire professionals to assist in the management of their companies. When it comes time to sell the business, these professional managers sometimes feel that the sale of the company will negatively impact their management role.They may feel that: 

            • They may lose their position within the company if the buyer installs its own management team
            • They will lose some of their current company benefits (e.g., vehicle, extended business travel, company credit cards, etc.)
            • The buyer will make pay level adjustments
            • Their work performance will be under greater scrutiny with more stringent performance metrics

Entrepreneurs are usually aware of this conflict of interest; however, being aware of it is not enough. This potential conflict of interest must actively be monitored and managed, otherwise, there is the possibility that the sales process may be compromised.

I saw this a few years ago when engaged to sell a company. The company was owned 50/50 by a husband (let’s say James) and his wife (let’s say Susan). As I was preparing the initial documents for marketing the sale of the business, James sadly passed way. As CEO, he had managed all aspects of the business.

After his death, the VP (lets call him David) became the major decision maker for company operations. David was 62 years old, had been with the company for 20+ years, and was three years away from retirement. From my discussion with him I knew that he wanted to work until 65 years of age when he would retire. The looming sale of the company could clearly jeopardize his plan.

Once the preliminary marketing material had been prepared,  I began to identify and vet potential buyers. My next step was emailing an information package on each buyer to Susan for approval. Each time I did, she would veto the prospective buyer.

It was obvious to me that my emails were being forwarded to the David for his recommendations. Usually getting input from senior management on buy/sell decisions can be very constructive. However, it quickly became clear to me that David did not want to see this business sold – except to one particular buyer. This buyer was a direct competitor of the company, and I was advised by David and Susan that he represented the ideal purchaser. Unknown to me at the time was the fact that David had strong personal ties with this buyer. If the company were to be acquired by his buyer, then David would likely not be replaced or let go.

Over the course nine months  I identified and vetted numerous interested buyers. All were vetoed. In the end it turned out that this “ideal buyer” was only interested in my client’s  customer list. The buyer was not interested in the well-being of the employees or the acquisition of the capital assets of the company. His only interest was my client’s book of business. My client was hugely disappointed, and I suspect David was hugely content with the non-outcome. His priorities were clearly not aligned with those of my client, and given his tenured, trusted role in the company there had been little I could do over-ride his sway.  

Lesson learned, entrepreneurs selling their businesses must constantly monitor and assess the actions and advice of their professional managers to determine the degree, if any, that their recommendations are skewed by self-interest.

Copyright 2021