I love analogies…they are quaint and often times are a simple way to translate a situation in terms that are clear. There is a cognitive bias written by an American Psychologist, Andrew Maslow. It is known as The law of the instrument, law of the hammer, Maslow’s hammer (or gavel), or golden hammer. Basically it reads “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail”
Buyers and sellers rarely have experience in business sales so this cognitive bias pops up every day. They by default defer to experiences they have and without baseline understanding of the complexities of business sales and the legal and financing nuances do things or make decisions that are prohibitive to getting deals done.
One of the common ones we encounter is in the hiring of professionals whether they be brokers, lawyers, or accountants. These professionals as well are subject to the bias of Maslow’s Hammer. A degree does not prohibit you from human nature you see.
Here are some remedies to mitigate this issue:
- Sellers and Buyers both must be educated and understand the process from both sides of the equations. Unlike real estate transaction many sales have mostly good will and as such the experience you no doubt have had in real estate transactions does not transfer. Everything from lending to valuation is monumentally different.
- Just because someone is a CPA or an attorney or a broker does not mean they have experience or “time in the desert”. When I was a young lieutenant in the Army I was told that although I was in charge I would be wise to listen to the senior non commissioned officers (NCO’s) who had decades more practical experience. Book Learning is not a substitute for experience. The two must work hand in hand and as the principal you need to assess your team (lawyer, cpa, broker) understanding of this nuance.
- Be In Charge: It is very common for successful Busines owners to give undo authority to their team. Often one will step into other lanes, take too much control, and not work toward a holistic end. Not out of malice but out of the cognitive dissonance found in their profession. Business deals are heavy on nuance and as the principal you are the one who makes decisions not the team. So hold them accountable, give them direction and control them. Also make sure they work in a professional manner with each other and show respect to others.
- Recognize the impact of the lending market on your deal: Since everyone at this level is generally familiar with buying and selling houses they assume buying businesses is the same in regard to simplicity and availability. IT IS NOT. The rules and requirements are monumentally different. Loan duration, EPA requirements, collateralization, interest rates and risk rations, landlord requirements, hands in the deal (buyer Attoreny, seller attorney, Environmental engineers, CPA’s Closing Attorney, bank attorney, loan officer, closer, brokers) are just a few of the people involved. Just like when you played the telephone game as a child the same confusion and competing interests come to play…
- Hire professionals with experience. If as an attorney or cpa you have only done one or two transactions you certainly are not going to have the width and breath of experience to know the nuances and possible solutions. Also, and this is critical. Business deals are not a fight. They are about compromise and finding solutions. If one side acts as “hammer” and approaches every negation combatively it makes for very very difficult deal making and often ends in failure.
- Win Wins are the objective. Start with the end in mind.
We have worked to provide buyers and sellers alike with resources for learning as you are the customer and you need to be equipped with information to make the best deal possible. Indeed, we believe that knowledge of this process should not be concentrated in the hands of the few but in the hands of the principles. Our resources page has links to ebooks, our podcast The Deal Board is on all social podcast platforms, and our YouTube channels are ripe with information as are our blogs. Please avail yourself of this data well in advance of contemplating a deal.
For a private consult you can contact me at www.yourfloridabusinessbroker.com or call 321-287-0349