Sellers, Be Aware of M&A Advisors’ Biases


A fascinating mergers & acquisitions topic rarely written about is, how would a business owner know if the advice they are receiving from M&A bankers is biased. Does the advice favor the owner or the banker?

From my experience, most business owners do bounce the decision to sell off family members, respected peers, professional advisors, or some combination of the three. While all these trusted confidants can offer wise insights, perhaps the most significant voice is that of the M&A banker.

The M&A banker lives in the world of M&A day after day. Technically, they, as much as anyone, would know whether it is wise to time an exit in the near term in a given situation. However, a dilemma exists. They have more to profit financially than any other confidant. How might their bias show up? How could the business owner avoid making the mistake of not spotting a bias?

What Advice Could be Biased?

First let us answer where bias might show up in conversations with an M&A banker. There are two main areas:

1. If driven by his or her profit, an M&A banker may recommend that an owner proceed now with pre-marketing efforts, instead of taking a step back to further strengthen the company for the tests it will face in an M&A transaction. If a banker fails to engage the owner in questions around preparedness first, then the business owner should take pause.

2. Valuation is often the most divisive topic in negotiating the sale of a company. It becomes a centerpiece of the purchase terms. Is an owner asked what valuation they would be comfortable with? Will the banker put time and effort into creating a credible, defendable discounted cash flow (“DCF”) valuation, when reaching valuation conclusions? If the banker is unwilling to complete a thorough valuation, that includes a DCF method, bias may exist.

How Do You Counter M&A Bias?

If a business owner does not experience the banker raising these two broad issues—the company’s preparedness for an M&A transaction and the owner’s comfort level with the valuation–then I believe there is the possibility of bias. If that is the case, how should a business owner counter the bias?

1. The owner should require the banker to investigate market interest on behalf of the owner. This means that the banker, for a fee, should offer to confidentially determine how broad, deep, and motivated is a pool of prospective acquirers for this particular acquisition.

The owner should also ask the banker to address the company’s preparedness for the transaction from the point of view of the due diligence scrutiny—a point that is least often considered. Time and time again, due diligence is that point in the transaction process, where the going gets tough. Why is that? Because due diligence is by its very nature, thorough, laborious and comprehensive. Sellers can prepare for due diligence in advance and mitigate problems that would arise from due diligence down the road.

2. The owner should require the banker conduct a valuation and discuss their findings in light of the owner’s expectations.

The Result of M&A Bias

Unfortunately, bias does occur in the M&A marketplace, enticing business owners to proceed in selling when in fact they should have waited to prepare more. This can be proven by various independent studies that show that difficulties ensue in the process. In the 2020 Private Capital Markets Report, prepared by Pepperdine University, a survey concluded that 25% of all M&A transactions, with M&A advisors, did not close in 2019. Of those that did, approximately 40% only reached closure by the use of earnouts. Unfortunately, and all too often, earnouts are not fully captured by the seller.

In efforts to deliver non-biased advice, Watermark Advisors offers: 1) Test the Market services that investigates the market appetite for a particular company in consideration of being sold; 2) valuations based off DCF approaches; and 3) a M&A Prep Report, which simulates an acquirer’s comprehensive due diligence efforts. Preparation done well, can result in better outcomes for the seller.