In many respects, the process of going to market for a business owner – or perhaps of being courted by a potential acquirer- can be exhilarating. In many cases, a sale will be the culmination of a life’s work. Adding to the excitement is the thrill of the chase – admit it… it feels good to be wanted! The pursuit by a more prominent firm, a private equity group, or perhaps a competitor is a validation of your efforts. But a pursuit-gone-wrong is probably one of the most familiar tales in the M&A ecosystem. Failure to understand the ecosystem – and, more importantly, your place in the ecosystem – is the most common reason for the pursuit-gone-wrong.
Why it Happens:
Buyers Are Smart
In general, buyers pursuing an M&A opportunity are more experienced than sellers. They tend to be larger, they tend to have assembled a staff that’s “been there, done that,” and they have a strategy. Often that strategy can be summed up as “taking advantage of unsuspecting sellers.” I had lunch the other day with a CFO that was just hired primarily to run the M&A team at a firm (In his last job, he had done 46 deals). The comment that stuck with me is, “we rarely looked at deals with bankers unless we want the company. It’s just too expensive, and we can’t get a good enough deal.”
Peel that back a bit. The guy that did 46 deals is pretty much all but declaring, “we want to do deals where we can take advantage of the seller and drive down price as much as possible.”
Takeaway: as a seller, you need to get up to speed ASAP. That comes from getting smart on the process and leveling the playing field with the advisory team you work with.
Related: Why M&A deals fail.
Savvy Buyers Play on Emotions
That same experienced buyer mentioned his #1 weapon in closing the deal. It wasn’t him, it wasn’t a strong balance sheet, and it wasn’t a pile of stock options. It was his CEO. The CEO was really good at reading sellers, getting them comfortable, and making them feel special. An experienced dealmaker like that has a playbook – making the seller feel important, all the while demonstrating why the low value they are going to offer makes perfect sense. I’ve seen this dance too many times to count, and it’s a beautiful thing to watch… so long as you aren’t on the receiving end.
Unfortunately, too many sellers are romanced with just this playbook. They enter discussions with no solid understanding of their actual value. But since they feel so good about the interaction, they don’t want to rock the boat too hard, afraid that the romance will end.
Takeaway: know the playbook, but even more importantly, know the numbers early.
When All Else Fails, Pull the Deadline Card
What happens when a seller starts to tap the brakes to investigate alternatives or validate prices? The buyer begins to introduce a deadline into the discussion. “Well, we need to get a deal done this quarter. If we can’t deploy capital here, we are going to have to look at other options.” That threat feels real – and sometimes it is. But if the deal were strategic, it probably isn’t.
We saw this happen recently with a small but highly attractive company. We were in discussions with two Fortune 100 Firms, one of whom pulled the Deadline Card. It didn’t work – ultimately, we closed with the other F100 company at a considerable higher value than the first.
Takeaways: First, Attractive companies almost always have options. Working from a position of strength helps to create opportunities – one of which is the ease with which you can walk away from a bad deal.
Don’t Rush into a Bad Deal.
Bottom line, the allure of selling the company you created can be substantial. When done right, buyers can create a slippery slope that can be hard to get off of. Instead, intelligent entrepreneurs get ahead of the problem. You do that by knowing the numbers, the process, and building an attractive and ready company. The result? You get to exit on your terms at the time of your choosing.