Classic Mistakes in Exit Strategy vol. 7: Running Out the Clock
By Eric Michaels, Senior Analyst, MergerTech Advisors
Is it better to have a poorly run M&A process with mediocre results or a perfectly run process without committing to one buyer in the end? Neither scenario will see you achieving your M&A goals, but it is important to reflect on this concept nonetheless: what is the value of a properly run process if you never pull the trigger?
Many of my prior blogs have discussed ways to properly run a M&A process, but it is important to remember that at the end of the day you want to sell your company. This is the underlying reason why you began this journey, from shopping M&A advisory firms, to spending hours of marketing and financial preparation work, to reviewing countless NDAs, and dedicating time for buyer conferences over the phone and in person. You have spent the last 4 to 6 months trying to convert your work into wealth.
One of the pitfalls of running a proper process is that good results can incentivize a seller to push their luck. If you are successful in soliciting numerous responses and have multiple offers in place, a seller can become overconfident in their negotiating position. At some point, buyers will not budge, either because the valuation is already high and cannot justify a better offer, or the negotiating process has gone on too long and they have lost the desire to continuously revise the agreement. Buyers become interested in acquiring your company because of the positive conversations you have had. The marketing message and discussions of your business models, financial performance, and potential synergies have resonated with the buyer and has peaked their interest. Getting caught at the end on minor sticking points in the purchase agreement or setting unreasonable valuation expectations will certainly cool a buyer’s enthusiasm.
Skillful negotiation is not only about maximizing your position, but it is also about knowing when to stop asking for more. If a buyer loses interest in acquiring you, they will not return to the negotiating table and you will have exhausted a great opportunity. It is important to remember that while your business is a unique and limited commodity, so are your buyers. Losing time in the final steps through fruitless negotiation or inactivity can only hurt your chances of successfully closing a deal.
Even worse, many sellers shift their focus in the final stages away from the buyers they have already taken down the aisle and start looking for new buyers to create an even more competitive environment. Just as it sounds, this is a backward moving decision. Going back to the middle or even beginning of the M&A process while negotiating an agreement with a buyer forces you to try to slow down or even pause progress with those interested parties. At some point, too much time will be lost and the buyer will either come to believe you are not serious or they may decide to acquire another company instead. Buyers have a limited amount of time and funding. These limitations can create short attention spans for buyers and if you have their attention, it is critical to make the most efficient use of that time. Once your time is up, you can’t buy more sand for your hourglass.
In the end, it is important to understand the difference between rejecting an offer because you want to negotiate and rejecting an offer because you believe running your business in its current form is of greater value to you.