September 1, 2020
5 Minute Read

4 common M&A Myths

You have likely heard some of them. In the world of M&A, there are a number of common deal myths that have become popular for one reason or another. This article aims to uncover and address some of the most frequent that we hear.

Myth #1: The obvious buyer is not always the right buyer

Keep your options open

One of the most common deal myths in M&A is that the “usual suspects” will always be the groups that bid the most for your business. While it is of course smart to include these groups in your auction process, we have seen many instances in which obvious competitors come in with a valuation in the middle of the pack. Conversely, it is not uncommon for a less obvious bidder to surprise you with a willingness to write the biggest check. The following chart illustrates real valuation ranges we have received from bidders on various deals. For each of the deals represented below, the highest bid received was from outlier bidders, while many of the bidders in the median to lower groupings were the large industry competitors:

It is important to remember that closely aligned competitors will likely have the most intel on comparable valuation multiples in your industry. As a result, they may be reluctant to deviate from that range. Fringe bidders operating in a tangential market may find premium value in adding your product or service to its market offering or value other aspects of your business you may not have considered. As a result, we generally encourage our clients to be willing to think outside the box when constructing the bidder list. Doing so can pay off in a big way.

Myth #2: You can handle selling your business on your own

Hire a wolfpack

As an entrepreneur, you have likely been conducting negotiations with suppliers, customers, and distributors for years or, in some cases, decades. Given you are in a position to sell your business for a large sum of money, it is a fair assumption that you have been highly successful in these negotiations. With that said, selling your company is likely the most important and complex deal you will ever close. Consequently, the value that can be left on the table without the support of an experienced M&A team can be substantial.

The fees associated with a deal team of investment bankers, attorneys, and accountants can seem exorbitant at first. With that said, we have yet to hear a client express that the value of their deal team didn’t pay for itself by the end of the process (often times many times over). Just as your surgeon, pilot, or carpenter could tell you, some things in life are worth going with the pros!

Myth #3: A signed LOI = a done deal

Hold off on buying that plane!

While signing an LOI with your selected buyer is a significant step in the process of closing a deal, it is far from the finish line. The next 30-90 (or in some cases, more) days of due diligence will likely be the most challenging and stressful stage of the deal process for you and your management team. Your deal team will help you navigate the emotional peaks and valleys, but remember that this is usually the stage where we say that most deals “die” three times.

It is important to remember that your leverage is the highest during the marketing and bidder selection stage. Inversely, the seller’s leverage falls precipitously the minute the LOI is signed. The bidder that had previously been wooing you in the courting stage of management calls and meetings is now doing everything they can to ensure they really want to marry your business. As you can probably imagine, this process can be painful and messy at times. Sometimes to the point that it can ultimately kill a deal. For this reason, we can’t overstate the importance of optimizing a deal’s certainly of close.

Myth #4: You can time the market

Focus on what you can control

One of the most common questions we get from our clients is “When should I take my company to market?” Our unsatisfactory answer to this question is always that “it depends”. While not the most gratifying answer for our clients, it is the truth. We tell them that the answer to this question hinges on evaluating timing through three different lenses:

Personal Timing: One of the most important, but often overlooked considerations to make when selling your business is your personal timing. This can be a result of a variety of factors including age, health, aspirations, among many others. Determining your personal timing will require introspection and understanding of your reasons for selling.

Business Timing: Equally as important as understanding your personal timing for selling your company, is determining your business timing. Business timing answers the question, “When is my business ready to sell?” For example, a business with declining revenues or profitability, or with significant unresolved risks, will generate suboptimal results when you go to sell. This is where we shamelessly plug our CoPilot Assessment, which will help ensure your company is optimized when you are ready to sell.

Market Timing: The most commonly asked about, and the hardest to answer. Anyone can analyze leading indicators or economic reports until they’re blue in the face, but the fact of the matter is that there is no crystal ball. If you need evidence of this, look no further than 2020. None of us know what the market holds over the next 6 to 12 months, so our advice to clients is to focus on ensuring that your personal and business timing are aligned first. In the midst of a major recession, it may be smart to hold on selling until valuations begin to normalize. but in our experience, trying to time the market for its highest peak can be a fool’s errand.

Final Thoughts

The common M&A myths outlined in this article are just the tip of the iceberg when it comes to deal fallacies. The most valuable advice we can offer as you start to think about selling your company is to prepare yourself as much as possible using experienced M&A professionals as a primary resource.

Authored by:

Bobby Motch
Associate

Class VI Securities, LLC