The Strategic Value of Overpaying ....Say What?

Wise to Overpay?

Morgan (not his real name) is going to have a nice exit from his business in about five years. Over the past four years, he has grown his company from annual revenue of $12 million to annual revenue of $35 million. About half of that growth has been organic, the other half has come through the acquisition of supporting businesses.

What’s particularly cool about Morgan’s story is how thoughtful and intentional he has developed this growth through acquisition strategy. “I want to sell my business in ten years,” Morgan told me when we first talked in 2016. “I want my company to be doing $50 million when I sell, but I can’t get there organically. Can you help me find two or three companies that would be right for me?”

That conversation started my long-term relationship with Morgan, helping him identify the right acquisition targets then negotiate the acquisitions. It has been a fun ride. In many respects, Morgan is the dream client…smart, nice, and reasonable. We have looked at more than 30 companies to get to the two I helped him acquire. We’ve spent a lot of time together, so I’ve seen up close how he thinks.

One of the things I most admire about Morgan is his approach to identifying the right targets. It’s not just a math exercise for him. He isn’t looking for the “best deal.” Just because we might find a bargain opportunity doesn’t mean we found the right target. Morgan described it this way when we got started. “I need to be sure the companies we acquire are a good cultural fit that will integrate well with my management team.”

Our most recent acquisition has proven to be a perfect strategic assemblage of talent and product, but Morgan had to overpay a bit. When I did my analysis on the target company, I suggested Morgan offer 5X on the target’s most recent twelve months EBITDA. But the owner wouldn’t consider less than 6.5X, which in my judgment was a non-starter. When I shared this news with Morgan, I expected him to say we should just move on, but instead, he said he’d consider an above-market price if the company fit his strategic parameters. Well, suffice it to say, once we dug into the target’s product and customer mix, we found that the fit with Morgan’s business was literally a dream come true.

Now, several months after the acquisition closed, it’s obvious the cultural fit has worked, and the combined companies are hitting on all cylinders. I think back to consider the missed opportunity had Morgan taken my advice. While I focused on the numbers, Morgan focused on the opportunity. Even having overpaid by 12-15%, this acquisition has still turned out to be a fabulous deal for Morgan.

While I don’t recommend a buyer ignore economic reality when considering the value of a target acquisition, I do recommend making strategic considerations equal to valuation. A “good deal with a mediocre strategy” is not as good for a buyer as an “OK deal with the right strategy.”

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 . He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The principles above are true, but the story, names and fact patterns are changed to preserve the parties’ identities.

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Jim is an attorney (non-resident status with the Missouri Bar) and though he no longer practices law, he has read and negotiated enough legal documents to fill a cargo tanker. He has an MBA from Harvard Business School and knows how Wall Street and private equity operates. Jim is a Tennessee Supreme Court Rule 31 listed general civil mediator with tons of experience helping business owners (large and small) work through sensitive problems to achieve winning results. He is the author of "Home Run, A Pro's Guide to Selling Your Business, Seven Principles to Make Your Company Irresistible."