Buyer’s Folly – Why Buying a Company is More Complicated than You May Think

The acquisition minded executive is the norm in the business world. Most executives I’ve talked to are either actively seeking acquisitions or, to use their common turn of phrase, they’re “opportunistic.” In other words, if the right deal falls into their laps, they might be stirred into action. 

As I point out in my book and in my presentations, and as I have experienced in my career as an M&A investment banker, buying a company is one of the most difficult undertakings in business. This reality is seemingly counter-intuitive, after all, buying a product or service is usually easy, right? All you need is money. Selling a product or service, that’s the difficult and frustrating task, as any salesperson will tell you. But in the world of M&A, roles are reversed. Selling is (relatively) easy. Buying is difficult. To understand why, we must first examine the components of M&A work.  

Buckets

I divvy up acquisition work into three components, or buckets as I like to say: search, negotiate, finance. In reverse order, the finance bucket is often the easiest. Companies either have the capital on their balance sheets, or they are able to obtain it through equity investors and/or a loan from the bank. The negotiate bucket is, in my humble opinion, the fun part of the job. But the search bucket? That’s the part of the process that often gets short shrift, and in my opinion, that is due to our experiences buying just about anything except companies. 

The grocery store

I suspect one of the reasons why the difficulty in buying a business is not apparent to many people is because those people have experienced the difficulty with selling a product or service. They know how difficult that is, and like most salespeople, they wistfully fantasized about being the buyer. The buyer seems to be the one who has all the power, right? The buyer has the easy job, right? In that regard, the would-be buyer of a business thinks of being in a grocery store, pushing a cart, trying to decide which can of beans to buy. 

In the world of M&A, the roles are flipped. The would-be buyer of businesses is not the one pushing a shopping cart down the aisle of the store, deciding which can of beans to buy. Instead, the buyer of businesses is the can of beans on the shelf. The one pushing the cart is the business owner, because very often in M&A, the business owner is the one who selects which buyer wins the mandate. 

M&A is supply side

As I have told countless owners, the supply of buyers greatly outnumbers sellers in the M&A game. We simply have far more capital seeking a home (a business to buy, in other words) than we have properties for sale. The last decade and a half of loose money and low interest rates has only added to the excess capital in our economy. Beyond the machinations of the Federal Reserve and the pedantic nature of monetary policy, we have another factor that creates this imbalance. Business owners don’t want to sell their companies!

The flaw of demand side economics is exposed in the world of M&A. Here, an increase in demand will not create a corresponding increase in supply. The hypothetical I have used many times is to think of a 45 year old who owns his own company. He’s married with young kids, his wife is happy, his health is good, he loves what he does, and he earns well into seven figures each year. He jumps out of bed in the morning because he enjoys his work – and his life – so much. An inquiry about whether he wants to sell his company would be met with a simple retort: “I’m doing exactly what I want to do. What else would I do with my time?” In this scenario, you cannot offer enough money to buy this person’s company.

Increased demand without a commensurate increase in supply will result in inflation, and as those who have followed the M&A industry for the last decade and a half will attest, valuations are higher now than in years past.

The perfect deal for me…and why it’s so perfect for me

Yet another error I have seen far too often occurs during the compilation of the attributes to be found in the fantasy acquisition. These lists always feature the perfect target – rapid growth, fat margins, no customer concentrations, repeat business, a simple-to-understand business, solid management team, scant employee turnover, high barriers to entry – along with the most desirable attribute for the buyer: motivated seller. A buyer seeking a “motivated” seller, for the uninitiated, means “I don’t want to pay much.” Yes, buying a great company at a low price would be appealing, but only to the buyer. Someone is on the other side of that trade. The owner of that desirable company – one that checks all the fantasy boxes of the buyer – will have no interest, desire, or incentive to sell that great company at a low price. 

The approach

The final entry in our list of errors is the approach made by too many would-be acquirers. “We’re different, we have money and industry experience,” the would-be acquirer says, “and we want to buy your company.” That entire sentence is flawed, so let’s parse it, phrase by phrase. First, anyone can say they’re different, which renders the comment platitudinous. Money and industry experience are not differentiators because plenty of firms have money and experience. A professed interest in making an acquisition is not a differentiator, because plenty of companies want to buy other companies.

That simple, errant sentence is flawed for yet another reason. Read it again. Notice anything? The pitch is all about the buyer. Nothing in that sentence is specific to the seller. And that sets up our thoughts on how to counter these mistakes.

An M&A thesis

Where “let’s buy a company” is a strategy, an M&A thesis is a tactic you can use to help make that strategy a success. What is a thesis? Simply put, it means you have thought of a reason to make an acquisition that involves the company you plan to approach. What is occurring in your industry? Do you have some insights about what you think will happen? Do you see something in the target that leads you to believe a combination of the two firms will yield some sort of mutual benefit? And here’s the most important aspect: make sure you get the owner’s opinion of your thesis. If you get the other side invested in the idea, if you can have a two way conversation, and if you are artful enough in your discourse, perhaps you can move the conversation to a discussion of some sort of business combination.  

Make a list of specific companies

In conjunction with having an M&A thesis, do some research and create a list of companies that might be suitable acquisition targets. This tactic is the counter to the passive approach of opportunistically waiting for the perfect deal to be tossed over the transom. You also need to play the numbers game. If your list has only one company, your odds of success are very small. I’d start with a list of twenty companies. 

Once you have your list and your M&A thesis, you’re ready to make contact. Depending on the situation and the preferences of the owner, a phone call might work, or perhaps an email, or if you want to do things old school, send a letter. Work the list, try different approaches, you’ll likely need multiple approaches before you make contact with some of your targets. If you are active enough, and creative enough, you should be able to have a handful of conversations, and if you have conversations, you’ll have some meetings, and if you have enough meetings, you’ll eventually hook a viable target. If you strike out completely, create another list of twenty companies, and try again. 

An offer, not an ask

As you work your list, you’ll eventually connect with a business owner, and when you do, this is where your thesis comes into play. Explain that you have a notion about the owner’s industry. “You’re obviously an expert,” you can say, “and I’d welcome your opinion.” Offer to pick up the tab at lunch, or if you have a membership at a tony golf club, see if the owner would be interested in joining you. Lunch and golf are not the only offers you can make. Sporting clays, a baseball game, dinner, tennis, pickleball, anything can be used as a suitable offer. If you focus your efforts on offering something of real value, you will increase your odds that you will get a positive response. 

Conclusion: Would you take the deal you’re offering? 

In business, as in life, we often fail to think of the other side. In M&A, that insularity means the buyer only thinks about one thing: “The perfect deal for me…and why it is so perfect for me.” A buyer who is focused only on putting together the best deal for itself means the other side of that trade, the seller, has been overlooked and forgotten. Ask yourself if you would accept the same deal you are offering the other side. I’ve done that exercise many times with my clients, and on more occasions than you might think, the would-be buyer scoffed at the notion of accepting the offer. If you are unwilling to accept what you offer, guess what? The other side will likely come to the same conclusion. 

Your odds of success in the acquisition game increase when you can think of a thesis, find something of value to offer the other side, and put together a reasonable deal that you would accept if roles were reversed.

Written by Bill Snow.

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