Given all the ups and downs of the past 18 months in M&A, it’s reasonable to believe that the psychology of sellers has been affected. But from Walden Businesses Principal Sara Burden’s perspective, she doesn’t see a tremendous change in the way sellers view things. However, there are other changes that are impacting sellers in a more material way.
“There's been such a dramatic change in the level of due diligence that is expected these days that the sellers are not prepared for that,” Burden said at the Atlanta Smart Business Dealmakers Conference. “They’re not prepared for the QofEs at the lower levels that we are now seeing.”
Something that doesn’t get accounted for often is the emotional component that comes into play in a deal. When there are setbacks or frustrations during the process, it can be the case that the one thing that keeps a deal going, despite every hiccup, is that the seller likes the buyer, and vice versa. And sometimes, if not for that emotional connection, otherwise small hiccups could cause a deal to crater.
Also, when it comes to seller perspective on valuation, she says every seller comes into a transaction expecting their business to be worth two or three times more than what it really is, usually because they had a conversation with a friend or peer that convinced them that that would be the case.
“They all tend to come in with the expectation that their business is worth more than it really is,” she says. “But it's our jobs to be able to coach them into the reality of what you think it's worth and what the buying market feels it's worth are two different things.”
Still, the biggest hurdle she’s trying to prepare someone for as they go through a process is the level of due diligence. That’s because today it's so much greater and deeper than it was even three years ago.
She says in one deal, she worked with a seller ahead of a process to estimate a rough number of what the value would be so the owner could determine if it’s close enough to get what he wants out of a deal, or if it’s necessary to build it up a little more. The number was close enough to proceed. Because of the company’s size and the EBITDA involved, she suggested having audited financial statements, which the seller agreed to do. When the seller got back with the audited statements a short time later, they were on the money, so they could go to market with the value they had. Soon, they had a letter of intent for the full price 20 days into the process from a PE-backed strategic buyer that was a perfect fit. When the buyers came in and began their due diligence, he was prepared — everything was methodical, and the reporting was there. The deal closed a few months later.
“I've had deals 10 times smaller than that take way longer,” Burden says. “But because he was prepared, because he was ready, and because when the buyers would ask for something, if he had to stay up all night to generate that report or to get the information that they needed, he would have it ready for them. They were not waiting on him. He was waiting on them for the next series of questions. So, being prepared is super, super important.”
