Having taken part in countless conversations and many successful mergers and acquisitions, I’ve gotten to experience both realistic and unrealistic expectations from buyers and sellers alike.
Many of my observations stem from chats I’ve had with potential sellers that my company may acquire. I have to constantly remind myself that selling a company is usually a once-in-a-lifetime transaction and that most people don’t know the finer intricacies.
I decided to make a list of some common myths about mergers and acquisitions that tend kill deals or at least start them off on the wrong foot.
Buyers pay cash upfront for the full value
I am not sure if people actually believe this or if it’s simply wishful thinking. However, the likelihood of a buyer dropping a duffle bag of cash on your desk for the full value of your company is extremely miniscule.
Don’t expect a check for that amount either. In a real estate company transaction, the price is almost always structured as a cash downpayment, plus a multi-year earn out.
In cases where the buyer pays all cash, the seller usually takes a significant haircut on the price, sometimes as much as 40%. When your inventory (i.e. agents) can simply get up and walk out the door, buyers are less enthusiastic about taking on all the liability and front loading the transaction with cash.
There is a standard method to determine the value
Speaking of the company’s value, many people ask me what the “standard multiple” is for their EBITDA (earnings before interest, taxes, depreciation, and amortization). That figure is in the same ballpark as net income, for the sake of simplicity.
The multiple is a number used to calculate the value of the company by multiplying it by the EBITDA. For example, a three multiple on a $100,000 EBITDA yields a value of $300,000. While it sounds easy enough, simply picking a multiple out of thin air isn’t the way it’s done.
Much depends on the earn-out structure and the seller’s motivation and desire to stay on after closing. A shorter earnout with more cash upfront, would likely have a lower multiple. Determining the value requires several conversations, an understanding of the financials, and aligned motivations of all the parties.
Buyers will make an offer immediately
Company buyers that I know or consult with will never do that. In fact, presuming to know enough about a company to make an offer out of the gate is downright insulting to the seller. A serious buyer will seek to understand the seller’s company and personal motivations before structuring a deal.
It amazes me when a potential seller asks me in the first conversation what my offer is or what I am proposing. Then, they get frustrated because I say, “I don’t know enough about you yet.” That’s when I have to remind myself that they have never done this before.
If someone calls about buying your company, don’t ask what they are offering on the first call. Would you propose to someone on the first date?
No means no
If I had a nickel for every time I heard about a seller saying they aren’t interested in selling only to hear a year or two later that they sold, I would have a pocketful!
Most of the time, a prospect hasn’t thought about selling their company until someone plants the seed. They may even be indignant about the idea. However, over time, that kernel begins to sprout and eventually, they are ready to sell.
All I ever ask is that if there is any interest in learning about the next phase of their business cycle, I’d like to have a conversation. That’s all. We won’t always do business, but a true entrepreneur would want to explore what might be out there.
Buying or selling a company is easy
As many times as I will complete mergers and acquisitions, I will never say they are easy. Each one is different and there are emotions, personal baggage, hidden facts, misunderstandings, failures to communicate, happy outcomes, and crushing disappointments.
If you have questions, seek advice. Never let anyone tell you not to explore options. There are consultants who specialize in real estate M&A, or you can ask a peer with personal experience for advice. It’s not a simple process to buy or sell, but it doesn’t have to be painful, if done correctly.
I hope someone finds this list of the most common M&A myths that kill deals helpful. If you are a true entrepreneur, you should allow yourself the possibility that selling your company might be a great move. At least have the conversation and give it a fair amount of thought and energy before choosing a course of action.
If you are looking to grow your company through M&As, remember that the people you approach are largely unaware of the process. Be a resource to them by guiding them and smoothing the ups and downs along the way. There are plenty of opportunities on both sides. You just have to know how to get the deal across the finish line!
Stephen Meadows is Chief Operating Officer of Coldwell Banker Premier, a regional brokerage with 16 offices and 250 sales associates serving Virginia, West Virginia, Maryland, Delaware, Pennsylvania and Washington, D.C.
