Classic Mistakes in Exit Strategy vol. 5: Negotiating with an ATM
By Eric Michaels, Senior Analyst, MergerTech Advisors
It goes without saying that greed kills any deal. Whether it’s a buyer trying to get something for free or a seller driving a price beyond a reasonable limit, deals fall apart when “more” becomes “too much.” When you begin to visualize the person at the other end of the negotiating table as an ATM, a cash-filled machine, the conversation can only fizzle.
Since M&A transactions are unique processes for every business, the benefit of prior sales experience can be lost for a business owner who is inexperienced in M&A. An experienced M&A advisor knows that everyone who approaches the negotiating table has a point at which they will stand up and leave. While a seller views the transaction as an opportunity to exit the business, buyers are looking for a strategic partner that they can trust and work with in an effort to grow their own business inorganically. This creates a critical disconnect between buyer and seller as their intentions and motivations can be best described as opposing dynamics. As such, unpleasant conversations regarding valuation can easily kill a deal both from a financial and personal perspective (would a buyer and seller want to work each other after arguing about money for 3 weeks?)
The discussion shifts to valuation after the strategic fit is established. At this point, the buyer has begun visualizing adding your business to his portfolio. The remaining question is how far that buyer will go to make this acquisition happen. Sellers need to play a delicate balancing act between maximizing their valuation and maintaining buyer interest. On the other hand, buyers need to balance their financing with their desire to gain market position and grow their bottom line. This is the most critical part of the process because the topic of purchase price enters the picture. Up to this point, you should only have been discussing how your company will be a strategic, financial, and operational fit within the buyer’s organization and why an acquisition can be of great value to a buyer. Now that the issue of cost is discussed, it is very easy for the dynamics of the conversation to become antagonistic and ultimately break down yielding no results for either party.
Let’s assume you have a business that sells a widget for $50 each. You have sold countless widgets at that price point. As the business owner and a salesperson, you know the value of your product every time you enter a sales situation. When a prospective buyer tells you that the value of your product is $20, you can comfortably walk away knowing that you have succeeded at the $50 price point before and you will again. Now fast forward to the day you are selling your business to a prospective buyer. This is a moment where your prior sales experience may not help. Not only is selling a business completely different from selling a product or service, but it also something that is unique and valued on a case-by-case basis. As such, “shot in the dark” valuations can be typical where sellers ask for a valuation that may simply fit their retirement goals or ego. Likewise, buyers are naturally incentivized to grow inorganically at minimal cost. In these situations, it is important to fit your valuation expectations to market data, business fundamentals, and a strategic fit to the buyer’s business rather than personal desire or an expectation of price not based on company fundamentals, industry multiples, and the strategic fit with the buyer.
When you tell a buyer that your business fills their strategic needs and focus on their needs over your own, you create a rational and sound argument for them to pay a premium. Furthermore, a properly run M&A process with multiple buyers in play will give you the confidence to challenge a single buyer’s initial offer just like when prospective clients tried to negotiate to get your widget at less than market value.