How to Bridge the Price Gap in Acquisitions

Price is often the number one focus in mergers and acquisitions and everyone is eager to get down to the numbers.

However, as you might expect, buyers and sellers have very different expectations on price, which can lead to friction between the two parties. On the one hand, most sellers plan to offer their business to the highest bidder while buyers are looking for a cheap deal. Given the opposite viewpoints, it can be difficult to broach the issue of price and come to an agreement.

The best way to bridge this gap is to make sure you don’t focus on price as a primary driver for the acquisition. Before you even begin talking about dollars and cents, you should make sure the deal makes sense. Initially you should communicate the strategic value of why an acquisition between your two companies makes sense. This is a critical step, especially when approaching owners of not-for-sale companies. Aligning your vision with the owner’s vision prior to even discussion the details of a potential deal (such as price or deal structure) is paramount.

Once you’ve achieved strategic alignment and you begin negotiations, you must think about what you can offer an owner in addition to price that will convince him or her to sell to you. Money is a strong motivator, but it’s not the only motivator. As a buyer, you must identify the nonfinancial factors in addition to price that will motivate an owner to sell. Understanding the owner’s psychology is key to building a mutually beneficial deal.

Owners do sell their businesses for many reasons other than high price including:

  • Age – They may want to retire and are burned out
  • Family – They may have no heir to take over the business or their spouse may be nagging them to retire
  • Insecurity and risk – Selling now while the business is performing well may mitigate their risk
  • Excitement – They simply are excited to be considered for acquisition, because of the prestige or a possible financial windfall

Achieving strategic alignment before discussing price as well as identifying the issues that matter the most to the owner can help you bridge the gap between your number and theirs. When you approach owners with a complete understanding of all the different factors that are important to them – age, community, family, financial, and risk – you increase your chances of building a successful acquisition.

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