Six buyer search mistakes, from job or asset to diligence

Some buyer search mistakes are made by people who are tired, and the costly ones are about price. The six below run from the first decision to the diligence that follows: not settling job or asset, reading the asking price as a value, trusting the seller's intermediary, bidding to win, a vague letter of intent, and diligence that only confirms.

What to take away

Mistake one: not deciding whether you are buying a job or an asset

Two purchases hide under the phrase "buying a business". A job is a business you will run, and its earnings include the wage you pay yourself. An asset is a business someone else runs, and its earnings are what is left after that person is paid.

The same business has two different earnings figures depending on which you are buying, and therefore two different prices. Decide first, then decide what you can pay.

The cash you have is the start of that answer, not the answer. What you can pay depends on what a lender will advance against the business's verified earnings and the security available. Read how acquisitions are financed before you set the range, because buyers who skip this spend months on businesses in the wrong size range.

Mistake two: reading the asking price as a value

An asking price is the seller's opening position, set with an intermediary whose fee rises with it. It is information about what the seller wants, and nothing else. A price can be high because the business is good or because the seller needs it to be.

Buyers who sort listings by price, or judge a business as cheap or dear against its own asking figure, have let the seller define the scale. Build your own figure from the earnings and the structure, then compare it with the ask.

The fee point matters here. When an intermediary's pay rises with the price, the asking figure carries that incentive, which is why the engagement letter clauses are worth reading even from the buyer's side of the table.

Mistake three: treating the seller's intermediary as your adviser

The seller's intermediary is pleasant, informed and paid by the seller on completion, so everything they say is shaped by that. Understand the broker's position and use them for what they are good at, which is running a process, not for advice on whether to proceed.

That leaves a gap on the buyer's side. Someone has to judge the earnings and someone has to read the terms, and neither is the person on the other side of the table. Vetting a buy-side search service is one way to fill the first gap before you sign with anyone.

Mistake four: bidding to win

In a contested process, the buyer who prevails is often the one who believed the most optimistic version of the numbers. That is the winner's curse in its textbook form.

If you find yourself raising an offer to stay in the running, ask what you have learned about the business since the last offer. If the answer is nothing, the increase is a bet on the other bidders being wrong.

Write the walk-away figure down before the process starts, and show it to your accountant. Then a rival raising the stakes changes the offer only if it changes what you know.

Mistake five: leaving the letter of intent vague

A short, friendly letter with a price and little else feels like progress. It is the strongest position you will hold, given away. Structure, working capital, what stays with the seller, the transition, exclusivity and the conditions all belong in it.

The deal structures page lists what a structure decides. Each of those items left unstated in the letter is an argument you will have later from a weaker position.

Mistake six: using diligence to confirm, not to test

By the time diligence starts you have spent months, engaged advisers and told people you are buying. The temptation is to treat it as a formality. Set the scope the other way round: start with whatever would make you walk away, and only then work through the rest.

That pull is ordinary confirmation bias, and it is stronger in a search than in most decisions because the alternative is going back to the listings. The defense is to write down, before the package arrives, what would make you stop, and to have your accountant look for exactly that.

A finding that leads nowhere was research, not diligence. For each one, decide in advance what it should lead to: a lower price, a change in structure, a condition, or walking away.

The pattern underneath

Most of the six reduce to one thing: at some point the buyer began to want the deal more than they wanted to be right about the business.

A buyer with no view on price has nothing to check the wanting against, and the buyer search checklist sets gates that supply it. The late mistakes are what it looks like when it happens.

Common questions