Who Killed Your Deal?

Who Killed Your Deal?

Matt Gilbert

August 15, 2022

Going into any business opportunity, if you knew that 4 out of 5 of your competitors or peers who had pursued something similar had failed, would you even entertain the idea? I sure wouldn’t unless I knew there was a way to ensure I was in the 20% who succeeded! Realistically, how many business owners would want to risk those negative odds?

A little-talked-about issue when selling a privately-held business is the success ratio that the M&A industry experiences as a whole. Many studies show that the odds an average business owner has of successfully selling their business to a third-party acquirer is between 15-25%. That means there’s a 75-85% chance of failure.

The question is: What causes such a high failure rate among privately-held, lower-middle and middle market business sales?

Here are the top two reasons:

Value Misperception:

Many business owners believe the blood, sweat, and tears they’ve expended to get their business to its current level automatically equate to a high value. This way of thinking is a big misperception. A “sale-able” business is about the future not the past. Whatever “price they’ve paid” to achieve success does not automatically equal a higher transferrable value. For a buyer and their funding source(s) to be interested, there must be a Return on Investment that makes sense for them.

Serious Issues:

Would you buy a business with a looming IRS issue? How about HR compliance woes, a history of safety violations, or excessive warranty claims? If a business faces challenges like these, it’s important to get them in the rearview mirror before seeking a full-price sale. If the business does go to market with serious issues in play, it’s likely to be a distressed situation due to the buyer assuming the risks of correcting the problems. Deal terms will be priced and set accordingly, or else the sale won’t close. Buyers are justifiably compensated for taking on the mitigation of these types of risks. If a seller doesn’t want to face a purchase price discount, then these issues need to be addressed before attempting to sell.

When business owners align their expectations with a defendable fair market value and have verified there are no seriously risky issues, sale odds are improved to 50/50. But even then, why do only half of the businesses for sale achieve a successful close?

Inadequate Representation:

Many business owners think they can navigate selling their business without the aid of transaction specialists. Instead, they choose to self-negotiate, often employing a generalist attorney and tax-preparation-focused CPA to round out their team. Stop and think about the wisdom here.

• Do these advisors want what’s best for you? Yes, of course they do.

• But on the other hand, do they want to lose a long-time client? No. Well, that’s often what happens when a business is sold, so they may subconsciously seek obstacles to show the deal isn’t great for you.

• Are they M&A specialists? No, but maybe they told you they’ve handled a few M&A deals in the past and they can handle yours. I don’t want to offend any CPAs or attorneys; many are great friends of mine and of the firm, and we often refer work to them that falls in their wheelhouse. However, I speak from experience when I urge you to work with a transaction specialist for the largest financial and legal transaction of your life. Not doing so would be like taking your only child to a general practitioner for once-in-a-lifetime, life-altering surgery just because it may cost less or because your family has used this doctor for primary care needs for years. Reality is that a specialist who might appear to be more expensive – but who exclusively performs that particular surgery – would provide far better odds of achieving complete success for your child. Translation: When selling your business, this isn’t the time to pinch pennies. Hire top specialists! They’ll more than pay for themselves when they help you avoid costly mistakes, are more efficient, and provide a much-improved sale outcome.

Lack of competition:

Buyers are motivated to lure you into one-on-one negotiations. That is where their best chance of negotiating a great deal for themselves exists. They hate competition because it forces them to bend to the seller’s needs. When no competition exists, buyers drag their feet and often wear sellers down. They can draw harder lines because they know it’s difficult for a seller to walk away from the only interested buyer. And if that buyer walks, the sale is dead. However, having multiple parties go through the process simultaneously keeps control in the seller’s camp and ensures that if a buyer pulls out, there’s another buyer to take their place. Competition forces buyers to continually put their best foot forward. Business sales where a competitive process was properly orchestrated produce results that far exceed those that lacked it.

In a nutshell, if the sale of your business goes the way 4 out of 5 do and doesn’t close, who killed your deal? You did!

You killed your deal if you overpriced it, went to market with risky and unaddressed situations, tried to self-represent with advisors who concentrate in general law and income tax accounting, or if you ran a process with only one interested party. That is why ~80% of lower-middle and middle market businesses fail to sell.

To beat the odds, do what the successful 20% do:

• Understand what your fair market value is before going to market (get a valuation)

• Clear major obstacles prior to attempting to sell (pre-sale diligence)

• Interview and hire advisors specializing in M&A (know your options)

• Make sure the process your advisor deploys fosters healthy competition in a controlled progression (designed to get you the best deal possible)

If any of this resonates with you, we encourage you to take our M&A Discovery Questionnaire and talk with us to see if your business makes the cut as one who can still command a great exit in this M&A environment. We will be in touch quickly to discuss the results. Click here to take the assessment.

Gilbert & Pardue Transaction Advisors (GaP) is a Houston-based business advisory firm serving lower middle market and middle market business owners from coast to coast through representation for Mergers & Acquisitions (M&A).

Matt Gilbert and Bret Pardue established GaP to provide owners of lower middle market and middle market businesses – those businesses generally enjoying annual revenue of $10-$80 million – with the quality of M&A representation and value-enhancement services previously only available to upper middle and large businesses. GaP brings highly experienced executives, sophisticated financial and marketing products, proven-effective processes, and fully-integrated expertise to every engagement. No other M&A firm serving the lower middle and middle markets provides the quality of representation and transactional expertise that we do.

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