Living Together Before a Business Marriage

She is the perfect buyer for your company and you know there would be great synergy between your companies, but you can’t agree on valuation.

Kristen (not her real name) loved his business, and Jim (not his real name) wanted to sell it to her. They met 15 years ago while working for one of the nation’s largest insurance companies. Both were rising stars in the company, yet each had entrepreneurial instincts that led them to eventually leave to start their own business. Kristen settled in Nashville while Jim went to Denver. They stayed in touch over the years through their involvement in an industry trade association.

Kristen and Jim had settled into successful lives; both were married and had young children, both were perceived as leaders in their industry, and both were building successful companies. But there was one distinct difference between them. Kristen was the kind of entrepreneur who likes to build a business, whereas Jim was the kind of entrepreneur who likes to start a business then move on to the next one.

Jim was ready to move on, and he told Kristen that when they met last year on a retreat sponsored by the trade association in which they were both active. Kristen saw a perfect opportunity to grow her company by acquiring Jim’s. Jim felt she was the right buyer for his company because she knew the industry well. He also felt his clients and employees would be pleased to be part of Kristen’s growing enterprise.

It was a business marriage seemingly made in heaven, except the parties could not agree on valuation. Jim had a healthy expectation, bordering on being unrealistic. When Kristen called for advice on how to get the deal done, I suggested we mediate the relationship, that instead of me becoming her advocate (broker), both parties should retain me to work on their mutual behalf to reach an agreement. Jim loved the idea so we started the mediation process. It wasn’t long before the parties recognized that an outright purchase of Jim’s company was not in the cards. He wanted more than Kristen thought it was worth, and she was afraid some of his clients and even employees might bolt if he was no longer in the picture. Bottom line, while Kristen acknowledged the long-term value of owning Jim’s company, the fear of potential short-term disruption was keeping her from making the investment.

That’s when I suggested the parties live together to decide if marriage made sense.

Let me hasten to add, research proves that living together before a real marriage does not serve as a meaningful proxy that the marriage will be successful (not to mention the moral quagmire it creates). However living together before a business marriage can be a productive and worthwhile experiment (and it doesn’t create moral ambiguity). For Kristen and Jim, their “living together” business relationship would entail Jim selling Kristen’s service offerings to his clients, while Kristen sells Jim’s to her client base. The idea was to test the premise of synergy to determine how each party’s clients would view the others’ service offerings. If there wasn’t success there, the living arrangement should be terminated and talk of acquisition would be over. But if there were success cross-selling each other’s services, the parties would have more confidence about making the relationship permanent.

Living together before a business marriage takes intention and attention. Two companies might talk about the idea of synergy between them, but they have to dedicate and focus resources to test the idea. During our mediated process, I asked Jim and Kristen to each identify a key lieutenant to have responsibility to make the cross-selling test work, and we identified the metrics by which each lieutenant would be measured.

We are too early in the process to declare victory, but we have a template to determine if there’s logic in a long-term relationship.  If the parties decide walk down the aisle, I’ll let you know.

 

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee.

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Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

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