make a number of mistakes when arranging
the sale of a company or when making an acquisition. This article
illustrates the nine most common mistakes that we have observed over
Selling at the
Timing is one
of the primary drivers for getting the best price when
selling a company. The best time to sell is when the market is heating
up when larger companies have the greatest need for your technology,
and they have decided to move into your market. They need to acquire
technology and expertise in order to make a speedy market entry.
Many companies wait too long before selling. There is always a reason
to delay the sale just get revenues up a little more, just get the
latest product version finished, etc. Venture capital firms are also
guilty of waiting too long. VCs are in the business of hitting home
runs, not singles or doubles. So they typically wait too long to sell,
hoping for that home run. The market may be on a different time
schedule than your company's growth curve. If you wait for revenues to
peak, there may be little growth left. One of the cardinal rules of
M&A is that a company should always sell before it needs to
Confusing Price with Value
To close any
transaction, the parties simply need to agree on price.
They do not need to agree on value. Price is necessary; value is not.
Different buyers will have various ideas about the value of a company.
In fact, values can vary dramatically depending on the strategic
importance to a particular buyer. If you trade me your bike for my
skateboard and we are both happy, there is no reason to establish a
Value in the technology sector is strategic. It is not based on the
company's financial statements. Do not get locked into valuation
formulas. For the most part they are irrelevant when selling a company
with strategic value. And multiples of revenue are entirely irrelevant.
Value is in the eye of the beholder. A company is worth whatever a
buyer is willing to pay.
Overlooking the Edges of the Market
presume that they know who the best buyers are because
they know their market space intimately. This mindset can be limiting
and insiders can be blind to the edges of the market. Markets are
always gray around the edges where change occurs more rapidly. These
peripheries are where the emerging buyers exist.
Emerging buyers are newer companies that are growing rapidly, often in
a new market sector. They are relatively unknown. Emerging buyers can
be excellent acquirers for acquisitions under $25 million. They regard
acquisitions as an attractive means to spur their growth. Emerging
buyers can be difficult to identify because they exist in fluid, less
defined sectors. These companies often have access to capital and an
acquisition may have more strategic importance to them than to other
4. Not Generating
price is achieved when there are multiple buyers and a
competitive bidding process. Even the presence of one additional buyer
can often make a dramatic difference on price. Many selling companies
make the mistake of not reaching out to enough potential buyers and not
generating competitive offers.
Casting a wide net ensures that all potential buyers will be contacted.
The smaller the acquisition, the more potential buyers there are. A
company selling for less than $25 million will have more potential
buyers than larger firms. How many companies should be contacted? We
usually contact between 75 and 125 companies in most searches. Then we
can be confident that all potential buyers have been contacted. In many
transactions that we have completed, the buyers were in adjacent
markets, using the acquisition for market entry. The more buyers, the
more competitive offers we obtain.
5. Not Getting
Buyers to the Table at the Same Time
It is a common
occurrence for tech companies to receive inquiries about
being acquired. Some acquirers may have a very serious interest. I am
frequently asked to assist with the sale of a company after the firm
has received interest from a particular buyer. Now the seller must
respond to that buyer and at the same time reach out to other potential
buyers. Thus, timing becomes a vital issue.
How can we respond to the current buyer in a timely manner and still
reach out to other buyers? We don't want the original buyer to go away;
they may be the best acquirer. The mistake that companies often make is
to take the first deal without reaching out aggressively to other
potential buyers. It is all too easy for a seller to convince
themselves that this buyer is the best one and will pay the highest
price. The only way to be sure is to reach out to other buyers and get
the parties to the bargaining table at the same time.
6. Not Being
assume that there are only a couple of ways to solve a
problem. Most problems, however, have multiple solutions. Step outside
the box; don't be too linear. First of all, do not assume that the
stated problem really is the problem. How a problem is expressed can
frame the potential solution possibilities. Perhaps there is a
different problem hiding within the putative problem. It is often
beneficial to restate a problem in a variety of ways, thus opening up
alternative possibilities to view the problem and new potential
Second, be aware of clinging to your assumptions. Many people rarely
question their assumptions; they view their assumptions as truths.
People make assumptions about the market, about the opposing party,
about their motives, etc. These assumptions may be
unrealistic. Check your assumptions.
Third, always look at the issues from your opponent's viewpoint. People
in the technology sectors can be a little too self-focused. They may
not fully understand the other side's position. Try to address the
problem from the other side's point of view.
7. Bad Negotiating
Bad negotiating includes a assortment of issues, but let's touch on the
most egregious ones. Not accurately understanding the other party's
positions is probably the biggest negotiating mistake. One must
understand the reasons behind their positions and also how they
perceive value. A good negotiator must understand the strategic
importance of the seller's technology, or other key assets, to a buyer.
Unseasoned negotiators often have unrealistic expectations for price
and terms. Such expectations can lead the negotiator down the wrong
paths and make the person unwilling to compromise when he is actually
negotiating from a position of weakness. Understanding the relative
positions of strength and weakness for each party is critical to
achieving the best outcome.
Never ever use e mail to negotiate. There is absolutely no immediate
feedback. You cannot hear their reaction, the tone of their voice. You
cannot tell how they feel about the issue. The telephone is a much
richer communication medium, offering immediate feedback about the tone
and color of conversation.
8. Failing to Seek
This point may
be a little self-serving, but it is a mistake that
occurs all the time. A CEO who negotiates the sale of his own company
puts himself at a distinct disadvantage. He or she cannot possibly view
the company objectively; nor can he spend the amount of time that
selling a company requires. There is no way a CEO can run the company
and competently manage the sale process at the same time. The
transaction will always be shortchanged and mistakes can be very costly.
An objective third party can be more effective in negotiations. He can
establish a constructive atmosphere, help defuse unreasonable claims
and minimize extreme posturing. A knowledgeable deal maker can overcome
problems, head off issues before they become serious, and keep the
parties on track. An experienced adviser increases the odds that the
transaction will be concluded at the best price and with the fewest
Perfect Acquisition Syndrome applies to acquirers who have developed
their acquisition criteria such that no company will ever live up to
their expectations. Perhaps they made an acquisition in recent years
that worked out great. Now this acquisition becomes the standard
against which all future acquisitions are judged. It is difficult for
any company to measure up to such a high standard.
The criteria were developed by the management team or acquisition
committee. They suggest criteria that sound smart. The tighter they
define it, the smarter it sounds. They end up developing perfect
criteria for the perfect acquisition. There is just one problem perfect
acquisitions are extremely rare. A better course of action is to
develop reasonable criteria, do your homework and have a plan to deal
with the components that are not perfect.