Why Self-Funded Searchers Fall In Love with Their First Deal
We see this happen all the time at Guardian Due Diligence. Self-funded searchers become enamored with the first deal they get serious with. It’s the kind of situation where everything feels right. The company is located in the right city. It’s the right price and right industry. You can’t wait to close this deal and move on with your life. Walking into due diligence and negotiation with this attitude can put you at disadvantage.
The end to a frustrating search
After months of searching, it’s exciting to find an acquisition deal that seems to fit your parameters. Finding the right deal means that you are one step closer to your goal. It means that you can show your family and spouse that the search process has been worth it. The idea of finally getting to make the life and career change that you’ve been working toward is enticing, especially if everything about the deal you found seems to align with your goals. What should be an objective process starts to be driven by emotion and hope.
The process of reviewing deal after deal can feel endless and can start to wear down your standards. Factors that were once a definite no might become a maybe or a concession you can deal with. The pros will start to carry much more weight than the cons because you’re getting tired of searching. For example, if the company you’re looking at is right down the street from your house and in the exact industry you’re looking for. Those huge pluses might outweigh a major negative like the clients being loyal to the existing owner and unlikely to stick with the company after you take over. Not seeing a major downside for what it is might lead you to make a bad investment.
The problem with falling in love with your first deal
First of all, the first deal you get serious with is unlikely to be the deal that closes. You have plenty of competition in the market who might be seeing the same advantages that you are. As a new searcher, you might not have the experience and skills needed to out-negotiate your competitors. Pouring much of your energy and resources into this first deal might not be the best use of your time. And, as you get more and more attached to the deal, you become more likely to make concessions that you wouldn’t if you were still being objective about the process. That might beat out your competitors, but it won’t leave you with the best investment possible.
When you’re enamored with a deal, you’re primed to rush the due diligence process and overpay. After your long search, you’re anxious to get the deal done. That can lead you to diminish your own power in negotiations. You are more persuadable on price and terms, and you are more likely to make compromises to close the deal faster.
Rushing your first deal, no matter how gratifying it might seem to be done, is never a good idea. Even if your deal does turn out to be perfect after thorough due diligence, you will be walking into your new business on better footing than if you rushed the process. Rushing or compromising on your deal can leave you realizing months later that you made a bad investment. Don’t let your inclination toward a deal or anxiety to get it done prevent you from making a smart investment.
What you can do about it
First of all, just be aware that this might happen to you. You might get caught up in the excitement of the deal and find yourself making concessions that you wouldn’t normally make. Be self-reflective during your decision-making process. Compare your initial must-haves at the beginning of your search with what you’re willing to take at this point. If that has changed, understand why and if the change logically makes sense. You might benefit also from having an advisor on your team that can give you a reality check. Make sure that they know your goals and can help you stick to them.
Be thorough in your due diligence process. The numbers never lie. What might seem like a perfect deal on the outside might not be supported by the data. That’s something that you won’t be able to ignore. The due diligence process will help you stay objective so you can make a great deal that’s right for you—whether that’s the first one you find or several stops down the road.
Falling in love with your first deal is one of the big mistakes you can make as a self-funded searcher. Find out other mistakes to avoid in our white paper “7 Biggest Deal Mistakes Buyers Make.”
