Don't Let Ego Kill a Deal

A healthy level of ego, along with self-esteem or self-importance, can be beneficial. It can fuel a person's drive, focus, and resilience when challenges arise. However, excessive ego can hinder the success of a mergers and acquisitions (M&A) deal. In fact, it can ultimately kill the deal.

Ego is a natural part of human behavior, and when individuals engage in an M&A process, their personalities and egos come into play. It's crucial for both the seller and potential buyer to keep their egos in check to ensure a successful M&A transaction. Otherwise, things can go awry.

With decades of experience navigating tech M&A deals, Codify Managing Partner Enrique Dominguez has observed how ego and greed can negatively impact negotiations. We spoke with him to gain the three key insights on the influence of ego in these deals.

1. Don’t Overvalue Your Company

   
   

   Ego often manifests as a seller's inflated perception of their company's value. Founders tend to assign worth to their business based on the years of effort they have invested in developing it. Yet, buyers evaluate companies from a different perspective. They consider factors such as whether the seller's company aligns with their strategy, its profitability, growth potential, innovation, and how it compares to competitors. Ultimately, the valuation of the seller's company is determined by the buyer, not the seller; it reflects what the buyer is willing to pay.

   
   

   Enrique shares a case where his client, a small company with €3 million in revenue, initially sought a sale price of €12 to €15 million. After taking the company to market, they received a €15 million offer from a large strategic buyer. Utilizing the Codify Optimal Outcome process with other bidders, a counteroffer was made, prompting the strategic buyer to offer €20 million. However, instead of accepting an offer that was six and a half times their revenue, the seller's team decided to raise their demand to €25 million or more—largely driven by ego and greed. This demand nearly jeopardized the deal. The buyer, put off by the sudden shift, stated, "You have seven days to accept our offer; otherwise, we will withdraw it." When that timeframe passed, the offer was rescinded. Fortunately, two weeks later, the buyer returned, and the company was sold for €22 million. Although the seller's situation ended well, Enrique cautions that when a buyer says "no," they rarely come back. In this situation, they did, but the process was prolonged due to the seller's ego and greed.

   
   

2. Don’t Dig in Your Heels During Negotiations

   
   

   Deals can collapse when sellers refuse to be reasonable and compromise. For example, Enrique managed a deal that was two to three weeks from closing. The buyer, a small public company, offered €18 million for Enrique's client company, including €10 million in cash at closing—with the remainder made up of rolled equity and a small earn-out. However, during negotiations, the seller failed to meet their revenue and earnings projections, increasing the buyer's perceived risk. To mitigate some of that risk, the buyer requested a reduction of the cash requirement to €9 million. The total offer remained €18 million; it was merely a decrease of €1 million in cash at closing, offset by €500,000 in additional stock and €500,000 in an earn-out. Despite falling short of revenue targets, the buyer still wanted to acquire the company for its technology and customer base. However, the seller refused to amend the agreement. This obstinacy ultimately killed the deal. The seller remains in business, but the initial offer was double what they could now expect in the market. In this instance, the seller's unwillingness to compromise was a significant mistake. Enrique advises his clients: "Be fair and reasonable. Don’t think it’s my way or the highway."

   
   

3. Don’t Get Frustrated by the Process

   
   

   Navigating the M&A process is time-consuming and requires significant effort. Enrique points out that many people are unaware of the work involved in generating enough interest to receive multiple offers, selecting the right offer, entering exclusivity, and engaging in ongoing negotiations. There are also intricacies involved in the purchase agreement and in determining how net working capital is calculated—essentially how the seller manages their finances. This complexity can frustrate sellers, leading them to say things like, "I give up. I'm done. I can't handle this. It’s just too much."

Enrique's advice: "Don’t let your frustration and ego stand in the way of achieving your goals. You need to pause, step back, and refocus on why you began this process, what you're trying to achieve, and your current position. Concentrate on what is necessary to complete the deal, because you initiated this journey with a specific purpose."