Unrealistic Expectations: A Roadblock to M&A Success

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April 7, 2022

We each view life through unique lenses, which our individualized experiences have shaped over many years. Our perspective is based on how we interpret real-life situations and conversations with business associates, colleagues, friends, and other influencers in our lives.

In mergers and acquisitions, the stories we tell ourselves can create unrealistic expectations that lead to unnecessary roadblocks to our M&A endeavors.

“Know Thyself”…and Thy Worth

Whether you’ve attended a function that discusses Mergers & Acquisitions or had conversations with other firm leaders, you’ve most likely heard comments such as “M&A multiples are at an all-time high” or “I sold my firm for 8x earnings”. It’s in our human DNA to walk away with sound bites from these conversations that we then try to apply to our own situation. While there may be facts and data that support the original message, there are also unique financial and non-financial factors in every transaction. If you’re in the market to sell your firm, it’s important you know that big firms are not buying smaller firms at 8-10x pre-tax earnings as a practical rule.  

Also important is knowing your value. Value is comprised of more than merely a calculation of reported earnings multiplied by an arbitrary multiple. Your true value encompasses financial performance and your culture, purpose, unique positioning in the marketplace, and many other non-financial factors. As the old saying goes, beauty is in the eye of the beholder, so you should take time to understand your firm’s identity and what qualities make it attractive to a strategically-minded buyer. This approach will yield a strong offering price, create the best opportunity for your employees, and help to secure your legacy. 

If you’re looking to buy a firm, know that while it is true that valuations are up, they aren’t way up, and we don’t see increases across the board. Many smaller firms are seeing offers in the traditional range, while some are not seeing any buyer interest. The feeding frenzy, fueled by an increase in the number of firms opting to use M&A as a component of their growth strategy and private equity’s recent attraction to the Architecture / Engineering industry’s predictive cashflows, has created a competitive environment that drives demand and leads to over-inflated offers. But at the end of the day, a business is only worth what the present value of anticipated future cash flows can yield. An independent valuation can help you counteract the hype and provide you with confidence in moving forward with a reasonable and fair offer.

Nothing Worth Having in Life Ever Comes Easy

We live in a society focused on immediate gratification, so it’s natural to expect that we should be able to make it happen quickly once we’ve decided to buy or sell. 

Over the past couple of years, the AE space has experienced record M&A activity, and as a result, many active buyers have reported a shortage of good firms to buy in a specific geography. At the same time, sellers face drawn-out searches for buyers due to internal and external marketability issues.  

Remember, the best outcome for both buyer and seller is to find the right combination of cultures, teams, services, and markets that will create a force to be reckoned with in the future. Buying and selling an AE firm is a significant investment and requires considerable patience to identify the best suitor that meets the criteria set out in your M&A strategy. Buyers should expect to approach many firms and initiate several conversations before the perfect match is found. Additionally, buyers should anticipate a timeline of 18 to 24 months from launching their M&A strategy to generating any measurable results of an acquisition. 

On the other hand, sellers should expect to kick the tires with several prospective buyers before an Indication of Interest (IOI) or Letter of Intent (LOI) is presented by an interested suitor. There will be some back-and-forth negotiations of critical terms and conditions before the LOI is signed. Once this dating phase is over, the buyer and seller will continue to evaluate and assess, over a 60 to 90-day span, the benefits, and challenges of joining the two firms together before the marriage is consummated.

Next Steps

Mergers and acquisitions are enormous growth opportunities but come with complex challenges. By setting realistic expectations, you can avoid the self-induced obstacles that commonly get in the way of reaching a successful M&A outcome. I’ll continue a look at this topic in my upcoming webinar, including tactics and strategies for maximizing deal value, understanding deal negotiation, and due diligence best practices.


Jeffrey Adams Director Mergers & Acquisitions

Categories: Merger & Acquisition