It’s oft-repeated that mergers and acquisitions is a buyer’s game. In most cases this is true because buyers doing much more buying of companies than sellers do selling. Private equity firms, corporate developers and even family offices tend to buy and sell many more times than individual sellers do. They’re often more experienced, more prepared, more strategic and less prone to bring emotion into the process. There are specific ways in which business sellers tend toward hurting their prospects of getting a deal done. In many cases they not only do so at their peril but at the ultimate peril of the sustainability of their companies. Here are a few mistakes sellers make when considering a merger or acquisition of a business.
The biggest reason deals don’t get done is typically because there is a disconnect between the unrealistic expectation of business sellers and the somewhat conservative bids from business buyers. In the illiquid market of private business, the worst case scenario is not getting a deal done for something that is a bit below market. It’s getting a deal done at all. From the buyers’ perspective, the worst case scenario is paying far too much for a business that doesn’t perform as expected or which requires more input than anticipated. Huge losses can result. Hence, the risk in these circumstances more often rests on the buyer than the seller.
When sellers are not realistic on the valuation range of their business and are unable or unwilling to capitulate on price to get a deal done, a deal may not get done at all.
We’ve seen the following scenario all-too-often. We have a business owner who we’ve been representing in the sale of her business for several months. They’ve had multiple on-site visits as well as offers from some very good suitors. However, upon seeing the perceived demand for their company, they start to get a bit greedy, saying things like, “I’m not going to sell this company if I don’t get XXM after tax.” These types of statements of course occur after we’ve already had internal discussions on value and we thought their valuation expectations were totally in check.
There are a couple of major issues with this type of emotion that bleeds out toward the end of M&A negotiations. First, when buyers get burned, they’re most likely going to come in much more tepidly--if at all--during a second go-around. This can be very bad for the seller who has been in discussion with multiple strategic buyers. There are typically fewer strategic buyers and they’re usually the buyers willing to pay the most. Spurning them at the end of a deal when they’ve sunk a bunch of time and money into a potential deal could mean you’ve burned the bridge irreparably for a potential future deal. It could also mean, you become damaged goods in the eyes of other potential buyers.
Word to the wise, if you’ve been through a strategically aligned auction with buyers that are willing to pay more than your advisor said your business was worth, then take the deal. You start messing with fire the minute you become too greedy.
Crossing the Bridge Twice
Don’t expect to cross a bridge twice. This is certainly true when a bridge is irreparably burned, like we discussed above, but can also be influenced by other exogenous factors as well. For instance, what if the industry in which you’re involved suddenly is upended by a newer technology which could put your business in a tailspin? What if you miss the wave of industry consolidation and, after the dust settles, lack the scale to compete with conglomerates? It’s difficult enough to sell a business without other outside forces pulling. Most owners fail to take into account other outside risks that could play a role in dampening a business’ prospects of selling.
This sin is especially egregious, in my opinion, when we work with owners who’re in their mid-seventies. In other words, they’re old. This isn't like flipping houses. The market is much less liquid and you may not have the chance to cross the bridge twice, especially with such a small pool of potential buyers.
Keeping Emotions in Check
When an owner’s entire life is tied to the equity and success of a business, it can be near to impossible to separate emotion from the decision to sell, let alone the process itself. Keeping emotions in check--insofar as is possible--without letting them get out of hand may be the best advice for a potential business seller.
A specific example may be helpful. We had a client of recent vintage who was bent on selling his company. We brought in multiple buyers and started to negotiate a deal with the owner. Everything was looking great, but right at the time we started to dive into due diligence, the seller began to get extremely irritable and the types of questions we were asking about the business. His irritability stemmed partly by his distrust of anyone (in this case it revolved around some of the information the buyers were requiring) and his own lack of understanding of the financials of his business. He was partly getting frustrated as a result of his hurt feelings over being embarrassed from not knowing enough. His feelings were natural for anyone in his circumstances and he had a great little business that he had built from the ground up. Unfortunately his temper made it difficult to work with him and he eventually cut all ties and decided to keep his company.
Make a decision early-on in the M&A process to remain calm and keep emotions in check. It may be the difference between success and failure when selling a company.
Many owners have a false sense of reality thanks to some of today’s wildly ridiculous valuations. Understanding what a business is worth and how a potential buyer is going to act and react to what the owner does has more of an impact on getting a deal done than many would-be sellers realize. Fortunately, cool tempers and logic overcome many a mid-market opportunity.