When a company is acquired by a larger organization and the founder-CEO stays on in some type of “earn out” or employment contract capacity, there are generally 5 emotional stages he or she goes through.
Except for the initial stage, the range of emotions experienced by outgoing founding CEOs is often very similar to the 5 stages of grief (denial, anger, bargaining, depression and acceptance) identified by noted grief expert David Kessler. If you find yourself in this position, here’s how you can work through the stages.
1. Elation. While there might be some grieving for the end of their entrepreneurial journey, usually those feelings are overshadowed by a host of positive emotions. The owner-CEO has built and captained a successful business and has been offered a significant amount of money. And he or she gets to keep working in the business during the transition period without the sleepless nights that came with the previous stage.
Owner-CEOs should brace themselves at this point for the next stage, by understanding that there is likely to be a significant shift in control and a change in their role as CEO. If they are not prepared, the second stage will be particularly difficult.
“the founder-ceo should recognize that these emotional stages are common (and expected) and prepare for each stage in advance while the agreement is being negotiated.”
2. Anger. As the acquiring company begins to move the acquired company into its culture, a whole slew of challenges surface for the CEO. These may include, among others:
Marginalizing of the CEO, who now becomes someone’s direct report and no longer has the autonomy to make major decisions Hiring, termination and reorganization of personnel over which the CEO has little control Installation of systems and personnel that could, depending on the acquisition agreement, negatively impact an anticipated final payout
The level of anger can be mitigated somewhat by spelling out in advance, during negotiations, exactly what the CEO role will look like after the acquisition: It is not likely to be the same, and the seller needs to know how much autonomy he will have, how much control he will have over systems and personnel, and what costs will be assessed against his company as a division of the larger entity that could impact the owner-CEO’s final payout.
3. Bargaining. At some point, the marginalized CEO begins to regret that he has stayed on to see his company restructured and absorbed and he begins to argue against changes that, in his view, make the company less entrepreneurial. When these arguments fail, he may try to bargain his way out of the employment agreement. Here again, a potential early release from the earnout or employment agreement can be negotiated up front, obviating the need to engage in extensive bargaining.
4. Depression. When the bargaining effort is not effective and there appears to be no outlet for his anger, the CEO becomes depressed. Depression may come even when care is taken to clarify up front the changes the CEO can anticipate. Being mentally prepared for this, and beginning work on whatever the next move will be for the CEO (Retirement? Consulting? A new business?) will help to minimize the negative impact of this stage. After years of 60-hour work weeks, if fewer hours are now required, the former CEO should be thinking about how he or she wants to spend those hours.
5. Acceptance. Ultimately, the CEO makes the decision to honor the terms of the employment agreement—at least to a minimal degree—and to begin looking for his or her next venture. This stage comes more quickly and with less drama when the precautions mentioned above are taken.
An owner-CEO who is offered an earnout or employment agreement and is aware that he or she potentially faces this emotional rollercoaster can negotiate an acquisition agreement with a very short transition period. If that is not possible, he or she can recognize that these emotional stages are common (and expected) and prepare for each stage in advance while the agreement is being negotiated.