Leaving Money on the Table? Avoid This Common M&A Mistake

Hey, it’s David

I recently had a conversation during a long flight where a company’s CEO told me the shareholders of his company decided to sell the business to an equal size competitor. When I asked if they were the high bidder during the M&A process, here was the exchange that ensued.

CEO: “Well, not exactly. They were the only group we spoke to. They approached us unsolicited, and we accepted their offer.”

Me: “Why didn’t you hire an investment banker to shop for other offers?”

CEO: “The shareholders decided they didn’t want to pay any fees to anyone.”

Me: “What if the banker had found a buyer willing to pay 50% more than what your competitor is paying?

CEO: “Well, that’s a good point but it’s too late now. We’ve signed a binding Purchase Agreement.”

Me: “So you saved a fee, but you potentially left millions on the table?”

CEO: “I guess that doesn’t sound very smart in hindsight, does it?”

This Conversation Highlights A Critical Mistake Seller Make During M&A Processes

When a seller fails to create a robust M&A process, whether they go it alone or if they hire an investment banker, it can lead to several negative outcomes for the seller. I call it, “The one-off Process.” Meaning, the Seller only talks to one Buyer, or doesn’t run any type of sales process to maximize valuation.

Here’s what happens when Sellers take this shortcut:

1. Lower valuation: Maximizing the company's valuation is a primary goal for any seller. However, without cultivating the right environment, they may fail to attract the most qualified and competitive buyers.

2. Few, or only one bidder: If a seller does not foster a competitive environment for the sale of their company, they may struggle to attract a sufficient number of potential buyers. This lack of competition can limit bidder interest and significantly reduce the likelihood of achieving the business's maximum valuation.

3. Longer sales process: Failing to establish an optimal selling environment can significantly prolong the sales process. This may result from limited interest from potential buyers or delays in providing buyers with the necessary information in a timely manner.

4. Weaker negotiating position: Without creating an optimal selling environment, the seller may find themselves in a diminished negotiating position with potential buyers. This can lead to a less advantageous deal, including less favorable terms and conditions.

5. Increased risk: A well-structured selling process is essential for identifying and mitigating transaction risks. Without such a process, sellers may overlook critical risks, leaving them unaddressed and ultimately increasing the overall risk of the transaction.

Final Thoughts

Overall, a robust selling process is crucial in ensuring a successful M&A transaction for the Seller. It helps to maximize the value of the business being sold, reduce risks, streamline the sales process, and ensure that the most suitable Buyers are identified and aware of the full value of the business.

Thank you!

David