I have had the pleasure of participating in many conversations and successful mergers and acquisitions. I have seen both realistic and unreasonable expectations from buyers and sellers.
Many of my observations are based on conversations I had with potential sellers for my company. I must remind myself that selling a business is a once in a lifetime transaction and that most people don’t understand the details.
I created a list of common myths about mergers, acquisitions that can kill deals or start them off wrong.
Buyers pay cash upfront to receive the full value
It’s hard to know if people believe it or if they just wish it was true. The likelihood that a buyer will drop a bag of cash on your desk to get the full value of your business is very low.
You shouldn’t expect a check for this amount. A real estate transaction almost always includes a cash downpayment and a multi-year earnout.
If the buyer pays cash, the seller will usually take a significant cut on the price, sometimes up to 40%. If your inventory (i.e. Buyers are less likely to take on the responsibility of front loading cash and taking inventory (i.e.
There is a standard way to determine the value
When discussing the company’s value, many people want to know what the “standard multiplier” for their EBITDA (earnings after interest, taxes and amortization) is. This figure is the same as net income for simplicity’s sake.
Multiplying the EBITDA by the multiple is a way to calculate the company’s value. A three-fold multiple of $100,000 EBITDA gives you a value $300,000. Although it sounds simple, it is not easy to pick a multiple from thin air.
Much depends on the seller’s motivation to stay after closing and on the structure of the earn-out. A shorter earnout with more cash upfront would likely result in a lower multiple. It takes many conversations, a good understanding of the financials and the alignment of motivations to determine the value.
Buyers will immediately make an offer
Companies that I know and consult with won’t do that. Selling a company is not going to be pleased if you assume that you know enough about it to make an offer. Before structuring a deal, a serious buyer will take the time to get to know the seller’s motivations and company.
It is amazing to me when a potential seller asks what my offer or what I propose in the first conversation. They get frustrated when I tell them, “I don’t know enough about your company yet.” This is when I have to remind themselves that they have never done it before.
Don’t ask someone to buy your company if they call. Would you propose to someone when you first meet?
No means no
If I had a nickel to spend on every seller who said they weren’t interested in selling, only to find out a year later that they sold their property, I would have a lot!
Most prospects won’t think about selling their company until someone plants seeds. Some prospects may be angry about the idea. They will eventually be ready to sell when the kernel starts to grow over time.
I only ask if they are interested in learning more about their next phase of the business cycle. That’s all. While we won’t always be in business, true entrepreneurs would love to explore the possibilities.
It is simple to buy or sell a company.
Although I will often complete mergers and acquisitions, they will not be easy. Each acquisition is unique and each one has its own emotions, personal baggage, hidden truths, misunderstandings and failures to communicate. There are happy outcomes and crushing disappointments.
Ask questions. Do not be afraid to explore your options. You can find real estate M&A consultants or ask a friend with personal experience for their advice. Although it is not an easy process to buy or to sell, it doesn’t have be difficult if done correctly.
I hope you find this list of M&A myths that kill deals useful. If you are an entrepreneur, selling your company may be a good idea. Before you decide on a course of action, it is worth having a conversation.
You should not approach people who are unfamiliar with M&As if you want to grow your business through them. You can be a resource for them by helping them navigate the process and assisting them with any bumps. Both sides have many opportunities. It’s up to you to make the deal work.
Stephen Meadows is Chief Operation Officer at Coldwell Banker Premier, which has 16 offices and 250 sales associates in Virginia, West Virginia, Maryland, Delaware, Pennsylvania, and Washington, D.C.