I've always been a big fan of beginning with an end in mind. But, in my experience, Strategic buyers are looking for a highly committed management team and a high-performing business that can add something strategic to what we are already doing.
- Is that management team really in it?
- Do they want to be part of what's next?
And when I looked at us buying Evercore back in 2017, they weren't running a process. John didn't want to distract his team. John knew that he might have to run that business for five or six more years before he ran a process.
And the danger was if he got his team distracted on the sale process, they would lose focus on their customer, culture, and hiring great employees. They would have higher turnover, all of which would cause the business performance to degrade.
What was striking to me was that John had people that wanted to be there. He didn't have a rented management team that came on board just to help sell the company.
There are circumstances where that works, but we were the opposite. We wanted every one of the managers to stay. And, in fact, the big piece of getting that deal done was engineering a three-year package where they put meaningful amounts of the money we're going to make on the table for the three years. And that was because they were committed to the business. So they wanted to be in it.
They weren't looking to get out and go to the beach and were comfortable with the buyer. And a great buyer would be looking for a great asset rate management team, which in turn reinforces the management team.
A buyer that would make you feel you're wanted and needed, your culture counts, and they want to learn from you. Could he have gotten more money from another buyer? Maybe. But all I know is that the performance of the business after the merger was massively good. And that was in part because we kept all the employees, and they knew that we were wanted.
And all of that is because John wasn't just trying to sell Evercore. John was trying to run a successful company. The team was trying to run a successful company. And in the process, they recognize that at some point, it may make sense for that successful company to be strategically aligned with a different capital structure or a different ownership structure.
But that was not what you wanted most of your team to focus on. That was the CEO's job to think about building a great company. And to me, that's the best way to manage an exit. Build a great company where most people would want to be part of it, as long as you sold it to the right buyer long into the future.
And I'll tell you another thing. If you've built that and you've got a compelling team. The buyer will be highly motivated to compensate that team for retention, not just for six months or a year, but to bring them into the company in a way that has longer-term sustainability.
On the flip side, I passed on a company before, and a big part of that was because even though I liked the CEO, he wasn't staying. And when I looked at that asset, I asked myself If I had enough skills on my management team to make this transaction a success, and I didn't.
Keys to Alignment
It helps to understand the company's culture when you're performing diligence or even pre-diligencing potential targets. In addition, understand the performance of the human side that the company's put together and what the background of the leader is.
At Evercore, I knew John's prior to exits, what kind of company he had left behind. I knew the levels of commitment as employees had. And so, it was thinking about all of that before John, and I ever started talking.
I could tell you that I would've been interested in buying any company John would've been running because I knew he put together good companies.
The other thing is that you want to have built a relationship where you are helping each other somehow. So you have a chance to experience what it's like to work together and what the management team feels on an iterative and continuous basis.
Strategic vs. Private Equity Model
Every one of my shareholders, when I ran Express Scripts, bought Express Scripts with an exit in mind. They just weren't a collective; they weren't a singular unit of private equity. They were large funds, all of whom had different targets to sell me.
My job was to build a management team that didn't pay a whole lot of attention to all of that on any given day. I was driven to drive the stock price value, don't get me wrong, and keep investors or attract new investors and so forth.
But, if I had a management that was only focused on the exit, you're going to get a different kind of performance out of it. Don't get me wrong, the mercenary model is not the only private equity model.
There are some really good private equity firms who are long holders, and create real long value. The market knows that they usually exit strategically, really thoughtfully companies that perform well.
But if you're private equity that sticks something out into the market and gets it sold because it happens to show really good annual operating revenues and annual operating profits, but it doesn't really have a sustained value, some buyers will be far less interested in paying top dollar for those assets than if that private equity company is known to build good, strong teams of people that are highly committed to the business.
The next 20 years, the world will be less transactional more relational as it relates to creating value and, attracting rare talent, and keeping it focused on innovating.
Planning an Exit
First of all, keep your team small. For example, when I was doing the Express Scripts - Cigna conversations with David, my team behind the scenes were less than six people that knew about this until two weeks before we announced it.
That's a tiny inner circle because I need most people running the business. After all, the exit is not guaranteed. David may have decided he wanted to go in another direction. Also, you can't just stop operating even if we got the deal done. We had customers counting on us to deliver.
You can also have someone to focus on your customers and clients and build your narrative early. David and I had people building the marketplace story collaboratively. We got people excited about the why. And it started with the two CEOs being excited about the why.
As the leader or the owner, you are obligated to understand your market value, know your options, and how to achieve it. But once you start a process, that roller coaster is going on the track, and suddenly there's no break pedal.
You got bankers that are aware, people are talking, and I'm working with several founders now who are evaluating the way to best ways to substantially raise money, and these are founders who will have access to capital even in this crazy market.
An action process can suck energy from the core of the business because of all management presentations and the people you need to talk to. You better be sure it's the right time to sell and that you're talking to the right people if you're going to do it.
It's like selling a house in a market that goes from a seller's market to a buyer's market. You have to either adjust your expectations or you got to pretty up your house. You're not suddenly going to put it on the auction block and get what you could have gotten.
You may wish to do that, but you have to change your strategy. And so, it's the same thing with the companies. You have to be thoughtful with your board or your ownership as it relates to the realistic options you've got.
Best Time to Sell
You must look at your innovation curves and your ability to penetrate or grow markets convincingly. And when you begin to see that you've hit the ceiling and further growth involves having to work with others, you start looking for partners or potential strategic exit.
If you have built a business just because you want money in your pocket then your time to sell is when it's performing like hell.
Back to my original point, your best time to sell the business is when you are strongly growing and you can get paid for a future multiple of your growth; that's fair given the likely growth ahead of the business.
Choosing the Buyer
Look at your competitors.
- Who else is my customer buying from?
- Who else is my customer looking at besides me?
- What are they doing differently?
- What are they doing innovatively that I can't do because they've got assets I may not have?
That's why I bought Evercore because I had a competitor that could go in and talk about their capabilities that I didn't have.
Communicating the Deal
If it takes you months or years, that will be a problem. People will go look for a safer place, and your place doesn't feel safe because there's uncertainty, and they don't think you're going to communicate.
But the big piece of it is, long before you're doing a transaction, you better have built a reputation as a leader of being a transparent, honest, authentic communicator. Because people will then believe you when you tell them something and when you're not talking, they'll trust you.
I never wanted the rumor to get out in front of me. You do have to be honest with folks. So if I'm in a town hall and if I'm not running a process today, but I have an employee ask if we are going to get sold, if I tell them I have no plans at this time to sell the company, they're going to think I'm full of crap.
You got to be more honest than that. Explain why you don't have any plans. You can say the business is growing by triple digits. We're well financed. We have a balance sheet that could carry us for the next two to three years.
Therefore, while there may be a day when it makes sense for us to be bought, our best course is to run the business as best as we can.
Convincing the Management Team to Sell
It was one of the things that gave me confidence because my team loved the thought of who was buying us. It wasn't perfect. We had some concerns about Cigna, but again, there was enough.
My team understood the external environment well. And the better we understood the external environment through a hundred different data points. In our case, we understood that the world is less and less comfortable with a standalone PBM.
We are performing at the top but we were getting less and less value for that growth from the market because they were concerned about the regulatory environment as well as the sovereignty of a standalone versus inside of a health plan where you had the chance to innovate with an unnatural partner that happened to be your owner.
We would be more valued if we could find a way to do that inside of a strategic health plan, and there weren't that many available at the time.
If I began marketing the company, I wouldn't be able to talk my team into it because they were smart enough to know. So we're going to immediately lower the price we get for the company and raise the likelihood of getting a buyer we don't want.
So why don't we take control of that situation and determine who the two or three buyers are?
Sometimes attritions are inevitable. Some of them don't want to be a part of a big company. Sometimes they don't like the leader that the new owner sends in or don't understand the logic of the merger.
In Accredo's case, the management team that left understood the merger's logic. I think they felt, they put the business and the employees in good hands. We managed that process with them. They didn't just run out the door.
And what we did is we chose the right kind of people to come in behind them because that's the first set of decisions they see you make. If they're leaders who they trusted are leaving. Then, they wonder who they are going to be working for. And so, we got very good at assessing the internal talent, which is what I did.
You need people to work together, but you did need people who understood the business. You do get exits. That's why when you're doing your diligence, you don't just look at the guys and women at the top layer. You want to look hard at the next layer.
If you think about that next layer below the direct layer, they may have been waiting for the people above them to leave or die for a while. So they may have hoped for an exit so that person would leave and they may have a chance to run that part of the business if they're committed to.
And so, sometimes those exits can be good, or you forcibly manage them.
Preparing for an Exit
You better get some really good outside advisors. You better ensure you're super aligned with your board because all the energy can get moved in really bad ways if you're not.
With good advisors, you can understand deeply the value of your company and some of the scenarios around that value. You speak to whoever your investors are, get alignment, and spend as much time as you need to on that.
And by the way, you do it individually with board members, not just collectively, because when you talk to an individual board member, they get to ask you questions that might be important.
Because every board wants to hear one thing in a strategic review.
- What's your plan to grow your business in double digits over the next five years?
- What are the weaknesses of that plan?
- What are the competitive threats to that plan?
- How do we continue to drive the results into our valuation?
Influence the Board
You have to manage the board collectively and individually. You have to do the individual part and understand where each person is and how to meet their needs. In our case, it was overcommunication. We were transparent like hell.
David and I had our board's authority when we did the Cigna deal. So two guys managed their boards very well to make that happen. And how you manage your board long-term is to get results when you're running your business.
Your board's going to give you a lot more rope when you're getting results, you're telling them what you're going to do, executing what you said you would do, and driving the results you said you would drive.
A third of my job is cultivating relationships with the board. But I was only able to do that because I had a management team that was so capable of running the day-to-day business.
So I could pay a lot of attention to the business without having to spend 40 hours a week just doing that.
And as a leader, if you have the kind of relationship with your board where they trust you to listen and to be accountable to constantly evaluating the status quo, they will be very helpful.
They aren't going to run the company, but they're going to be very helpful in your strategic thinking.
The hardest part of selling a business
The hardest part is turning the business's key over to someone else. Leaving is hard when you know you sold your company to someone who will make it better and you will not be part of it. Any founder or CEO that can say that is probably someone that's going to get a very good price for their company because they are all in every day.
It was the same for me at Express Scripts, so I stayed for three years. I couldn't bear to walk away from something that I was so excited about where I was going and what it was doing.