Anyone Can Pay $1 for $1…

…but the real challenge is to be able to pay 80 cents (or less) for that same $1 of value. Buying a company is no different. The seller wants to receive $1.00 of value (or more) for the $1.00 of value (or less) that he is selling you, and any fool can (and many do) rush to the closing having over-paid for an acquisition.

Years ago I had a partner whose words of wisdom still resonate with me. He used to say, and believe me he was correct, that you “make your money going in; and if you don’t you’ll be chasing your money throughout the deal.” That’s a lesson I’ve learned the hard way over the years, and as an investment banker am cautious when advising clients on buy-side M&A deals (some would say too cautious) not to overpay for the acquisition of a company.

When you go into a potential acquisition you’ve got to have discipline and not allow the heat of the moment, or the euphoria of the deal, to get the better of you and do something stupid (i.e. overpay). While at the end of the chase you may not end up with the prize, and sadly as advisor that has happened to us more times than I care to remember, it will allow you to avoid a costly mistake that you’ll live to regret down the road.

The seller of a company is entitled (perhaps too strong a word) to fair value for the business he is selling. He is NOT entitled to value for the synergies you as buyer can bring to the acquisition or any increment of value you may create through your hard work and effort post closing. Those belong to you as buyer, and are the compensation for you putting your capital and time at risk.

Being disciplined may not be a lot of fun, but in the end it’s a hell of a lot better than, as my former partner used to say, “chasing your money through the deal.”

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