You’ve built a rock-solid business. All the pieces are there—a great product, decent revenue, an extraordinary team—along with plenty of apparent demand in the market. A sale seems all but inevitable. So why isn’t anyone buying?
Because every step of an M&A transaction is designed for buyers to eliminate sellers or reprice the deal. To truly understand why, you’ll need to think like the person on the other end of the transaction. You’ll need to channel your inner buyer.
I’m not suggesting you immerse yourself in M&A literature or moonlight at a private equity firm. Your inner buyer is probably better developed than you realize. In fact, if you’ve ever purchased a home, you have essentially the perspective and experience you need.
Business Deals and Real Estate Deals: Not That Different
Consider the characteristics that make a home desirable or not: its size, its current condition, its potential future value, where it’s situated, the value of similar properties, and so forth. Virtually every factor influencing a real estate investment shows up in an M&A transaction as well.
Buyers are looking for assets that meet or exceed an extensive list of criteria. Like savvy home buyers, they’re not willing to settle or simply say “yes” to the first option presented. They’ll take any opportunity to negotiate down the asking price. And when they have a bad feeling about a situation, they’ll walk away.
Stage 1: Browsing and Screening
Homebuyers usually start their journeys by browsing and evaluating real estate listings on sites such as Trulia and Zillow. This high-level overview is where the vast majority of options get weeded out. If a home doesn’t align with the buyer’s overall requirements—if it doesn’t have enough bedrooms, for example, or is far out of the buyer’s price range—it doesn’t warrant consideration.
The same general process occurs in M&A, although there’s no Trulia equivalent for business deals. Instead, prospective buyers obtain basic information about a target—such as its profit margin, industry, customers, brand, and geographic footprint—by contacting the organization directly or through a “Teaser” developed by an investment bank or other intermediary. Although they can’t collect much data at this point, any early insights inform the decision to move forward but shape the buyer’s strategy and expectations. A seller who makes a lackluster impression appears disorganized, or fails to communicate in a timely matter can anticipate tough negotiations ahead. That is if they ever hear from the buyer again.
Stage 2: The Initial Walkthrough
Next come on-site visits and earnest conversations with sellers. In real estate, a buyer will tour a location to ascertain its condition and begin to plan any remodeling. In addition to the obvious issues and red flags (e.g. structural damage, poor workmanship, faulty wiring), curb appeal matters: Is the asset well-maintained and looked after? How is the neighborhood?
Business buyers make similar appraisals—of their targets, of their targets’ positions in their industries or markets, of the curb appeal of the deal, and of the organizational leaders in charge. While parties involved in M&A transactions certainly do conduct walkthroughs, conversations with a seller are perhaps more important than the physical state of a given facility or office. A buyer wants to know that the company is well-structured, well-run, performing at high capacity, and rooted in a sound business strategy. Problems in the company’s foundation, so to speak, can end a transaction or significantly diminish the buyer’s idea of an acceptable price.
Stage 3: Thorough Investigation
After communicating about the deal and discussing it with their families (or close advisors and stakeholders), the parties decide on terms and price. Before agreeing to the purchase, however, the buyer typically engages in an exhaustive investigation. A soon-to-be homeowner will complete a home inspection, looking at the property from top to bottom. If problems are found they might even hire a structural engineer, pest control expert, or another specialist. From bad water heaters to outstanding liens, issues discovered at this point may destroy a seller’s goodwill and lead the buyer to rescind the offer.
Businesses have their own skeletons in closets. Liabilities that crop up during late-stage due diligence can and do torpedo practically-consummated deals. Perhaps it’s a misvalued asset, or a pending lawsuit, or the absence of a contract with a major customer, or the departure of a key employee, or a compliance gap, or a severe operational inefficiency. Whatever form it takes, whenever it emerges during the transaction, any source of risk can motivate a buyer to demand a lower price or withdraw altogether.
Ready to Sell? Talk to a Professional First.
As a business seller, you’re at a natural disadvantage. As soon as the transaction begins, the value of your company—and your asking price—can only go down. The secret to maximizing your return is to think like a buyer. That means anticipating and addressing every possible liability proactively, before your business goes to market.
Most sellers don’t do this. They underestimate the effort involved in M&A and assume their businesses are ready for sale. Can you blame them? Owners should believe in their businesses. They can’t be objective—they’re too close.
That’s why valuation and M&A advisory professionals exist. At Quantive, we’ve developed a system that eliminates guesswork for sellers. Our Market Readiness Indicator gives you comprehensive insight into how and when to bring your business to market.