10 Proven Ways to Avoid Overpaying for an Acquisition
I have seen too many people get caught up on “deal frenzy”. The result: overpaying for a deal. Stick to business fundamentals and a plan. Once you become focused on an acquisition, it is easy to get sucked into a process. Fear of losing a deal can lead to overpaying. Particularly, in a competitive acquisition scenario (typically led by advisors or investment bankers), the threat of losing to another potential buyer must be kept in check. Fighting off deal frenzy is not easy. However these 10 strategies are critical to avoid overpaying for an acquisition:
1. Determine a Maximum Purchase Price – Be Prepared to Walk Away
The best deal can be the one you pass on. Every buyer has heard this, yet it is the strategy most commonly ignored. Far too many acquisitions fail because the buyer overpaid. If a seller has unrealistic expectations, don’t bail them out. Reality will eventually settle in and a reasonable negotiation may occur down the road. If another buyer is driving up the price, that doesn’t mean the business is necessarily more valuable. Others may have more synergies which can make a deal possible. Another prospective buyer may simply be wrong. Set a maximum price. If you are not able to buy at that price or lower – consider yourself lucky for not making a bad investment.
2. Understand the Seller’s Motivations
You need to understand what a seller wants out of deal. Is it just money? Retirement? An ongoing role in the business? If you understand their motivations, you will have more ability to negotiate. A seller may care a lot about their legacy. If they spent years building their business, they often want to ensure that it will be in good hands going forward. You must understand what matters to the seller.
3. Do Your Homework – Proper Due Diligence is Critical
Any prepared seller will have due diligence materials to get you excited about the business and guide you towards a purchase price. Rarely, does a seller highlight any major problems. However, as the buyer, you have to be prepared with your own due diligence requests. You need to learn as much as you can about every facet of the business before you make a deal. A seller can always hold off on information until you are closer to a deal, but they need to know what you need to get a deal closed. Communicate that your best offer is only possible with thorough due diligence.
4. Sweat the Small Stuff – Do Not Ignore Red Flags
Do not ignore red flags. When looking at an acquisition, if something seems like an issue, make sure you get the answers you need. Some examples may be a negative trend, a loss of a key client, changes with management, etc. If the seller can get you the answers you need – great. If not, you may need to reduce the price or walk from the deal.
5. Integration Expenses and Timeline
The time and resources to integrate an acquisition are often underestimated. If your team is already working at capacity, you will need outside help. If your internal team will manage integration, be prepared to have some constraints on existing business activities. Even the best team can only manage so many issues at a given time. Work with your advisors and management to understand the expected impact on your current business.
6. Pay for the Value that Exists – Benefit from the Value You Bring
Buyers and sellers routinely debate whether certain synergies (reduction of corporate staff, elimination of rents, supply cost savings, etc.) should increase the value of the deal. A buyer generally should not pay for value that they will bring after the closing of a transaction. However, if a seller demonstrates that they have created additional value which is not entirely reflected in their financials, then this may argue for some price increase.
7. Use Experts (Both Internal and External) to Assess Business
Every buyer should leverage the expertise of others to avoid overpaying for an acquisition or ignoring key issues. Financial and accounting experts should dissect financials. Counsel must review potential legal considerations. Use experts on your management team to review their areas of expertise.
8. Get to Exclusivity
As a potential buyer, you want to get exclusivity on a deal. This allows you to dig in deeper with other buyers on the sidelines. A 45 to 60 day exclusivity window is reasonable. Without other buyers in the midst, a seller will focus on getting a deal done.
9. Multiples are Tricky
You may hear that a business sold for x times revenue or y times EBITDA. That does not mean another business will sell at the same multiple. Many factors may impact financials (addbacks, synergies, etc.). So, multiples typically make sense within a given range. Work with an advisor who can guide you towards the right price.
10. Trust Your Instincts
If the deal doesn’t feel right, trust your instincts. Do not convince yourself that you have to complete the wrong deal. Walk away if the fit isn’t right. You should not waste money, time and energy on a deal that doesn’t make sense.
Acquisitiions are a great way to quickly grow your business. But, be smart. Overpaying for an acquisition can just as quickly damage your core business.
You can find additional articles from Michael Roub at Inflection 360 Articles.
Michael Roub has headed corporate development at multiple major firms. Mr. Roub began his career as an investment banker with Donaldson, Lufkin & Jenrette and has more than twenty years of mergers and acquisitions expertise. Mr. Roub has a BS in Economics from the Wharton School at the University of Pennsylvania and an MBA from the University of Chicago Booth School of Business. As Managing Partner of Inflection 360, Mr. Roub advises clients on strategic alternatives and M&A opportunities.
Michael Roub LinkedIn