A healthy dose of ego, a sense of self-esteem or self-importance, can be a good thing. It can fuel a person’s drive and focus, and foster resilience when things go wrong. But too much ego can get in the way of an M&A deal. In fact, it can kill a deal.
Having an ego is part of human nature, and when people go through an M&A process they bring their personality and ego with them. But it's important to understand that a successful M&A requires both the seller and potential buyer to keep their egos in check. Otherwise things can go very wrong.
With decades of experience shepherding tech M&A deals, Corum President Rob Griggs has seen some that have been negatively impacted by ego and greed. We sat down with him to get his insights regarding ego and its effect on deals.
Don’t overvalue your company
Often ego presents itself in a seller's overestimation of the value of their company. Founders often place a valuation on their business based on the years of sweat they put into building it. But a buyer views things through a different lens. Does the seller's company fit their strategy? Is it profitable? Is it growing? Is it innovative? How does it measure up to its competition? In short, the value of the seller's company is the value the buyer places on it, not the seller. It's what the buyer is willing to pay for the company.
Griggs recalls a situation where his client, a small $3 million revenue company, initially looked to get a $10-to $12 million dollar offer in a sale. Griggs took them to market and wound up getting a $12 million dollar offer from a very large strategic buyer. Taking advantage of the Corum Optimal Outcome process with other bidders, a counteroffer was delivered and the strategic came back with an offer of $20M. But then things took a strange turn. Rather than accept the offer, which would have been six and a half times the selling company's revenue, the seller's team decided to significantly increase their demand and asked for $30 million or higher – a demand largely driven by ego and greed. That demand almost killed the deal. The buyer, now put off by the change, said "You have seven days to accept our offer, otherwise we'll withdraw it." The allotted time went by and the offer got rescinded. Fortunately, the story did have a happy ending. Griggs said the buyer returned two weeks after the offer was rescinded, and eventually bought the company for $25 million. In this case, things worked out for the seller. But Griggs points out that once a buyer says no, they almost never come back. However, in this situation they did. “We got the deal done,” said Griggs, “But it took a long time because of the seller's ego and greed."
Don't dig in your heels during negotiations
Deals have been killed because of the seller's unwillingness to be reasonable and compromise. Case in point: Griggs led a deal that was two-to-three weeks away from closing. The buyer, a small public company, offered $18 million to purchase Griggs's client company, with $10 million in cash to be put up at closing ‒ some rolled equity and a small earn-out. However in the interim, the seller did not meet their revenue and earnings projections. Those shortfalls meant a greater risk for the buyer. And to share some of that risk, the buyer asked that the cash requirement be reduced to $9 million. Their offer was still $18 million; the difference was simply a reduction of $1 million in cash at closing, which was to be $500 thousand in additional public stock and $500 thousand in earn-out. Despite the seller missing their revenue and earnings targets, the buyer still wanted to buy the company for their technology and customer base. But the seller refused to make any changes in the agreement. That obstinacy killed the deal. The seller is still in business, but the offer the seller initially had is two times what they can now get in the market, according to Griggs. In this case, the seller's unwillingness to compromise was a major mistake. Griggs's advice to clients: "Be fair and reasonable. Don't think it's my way or the highway."
Don't get frustrated by the process
Going through an M&A process is time consuming and requires a lot of effort. Griggs notes that people generally don't understand what it takes to go out and generate enough interest to receive multiple offers, then to pick an offer, and go into exclusivity and ongoing negotiations. There are also the intricacies of the purchase agreement to contend with, and figuring out what net working capital is based on – in other words, how the seller did their accounting. Then there is all the work needed to close a transaction. Griggs says sellers often get frustrated and say things like "I give up. I'm done. I can't handle this. It's just too much." His advice: "Don't let your frustration and ego stand in the way of achieving your goals. You have to pause, step back, and focus on why you started the process, what you're trying to accomplish, and where you are with it. Focus on what it takes to finish the deal because you started this journey with a goal in mind. And as long as the goal hasn't changed, then stay on track."
A good way to counter that frustration is to get educated about the M&A process. Griggs puts it this way: "You just don't buy a car or a house without doing research and understanding the costs going forward. It's the same thing with M&A. The more informed you are, the more educated, and the more you understand what's around the corner ‒ the process and the timing of it ‒ the better you'll be able to handle it.” He adds, “Actually, the process can be invigorating for sellers because when they get a good offer, what they feel is ‘they like me,’ and the buyer is helping the seller achieve an optimal outcome.”