Shotgun Weddings

One of the best tips I’ve heard on interviewing is that you should always make sure the interviewee does more of the talking. Allowing a potential hire to drone on about how much they like to ski doesn’t seem like a wise use of time, but in many cases it can reveal a telling characteristic that you’re looking for or—in more cases than not—a trait that leads you to look elsewhere. Unfortunately, in today’s frenetic M&A market, the same advice isn’t always followed when interviewing potential acquisitions. The combination of accessible financing, abundant buyers and aggressive bankers—who can ask for double-digit multiples with a straight face—has created an environment where hasty due diligence is more common than an outburst from Terrell Owens. If you’re an attorney, accountant or other service provider in the M&A world, I’m preaching to the choir. But if you’re a buyer who’s shouting a hearty amen, you might have another thing coming. While strategics and sponsors alike complain about the state of the market, they perpetuate these dynamics when they willingly accept a rushed bidding process and/or pay gargantuan multiples to buy a company run by people they really don’t know or understand. You can blame bankers—just like homebuyers blame realtors for everything they hate about the homebuying process—but ultimately it’s the buyer’s choice to lower their standards before and after the transaction. To be sure, some of this is simple economics. Private equity firms raise money and then have a finite period of time in which to invest it, which encourages them to spend it now (or else give it back to their LPs). Strategic acquirers need to show growth, and doing that organically can be far more challenging than purchasing it. But some of this is also the result of what I call ‘buyer’s itch,’ which happens after an acquiror gets outbid four or five times and gets tired of going through the process with nothing to show for it. And for the majority of buyers on the acquisition trail over the past 18 months, that impatience is easy to understand. Financially, due diligence is a fairly standardized process by now, and it’s hard to believe that the skills involved in scrutinizing the numbers vary all that much among active acquirors. It’s the conceptual, emotional IQ skills, like the ability to read people’s body language, and the ability to ask the right questions of management, that are far harder to come by. As more middle market firms go after smaller companies—many of them mismanaged family businesses from dysfunctional families—those skills will be invaluable. And ultimately, giving yourself enough time to analyze those businesses is what will lead to healthy IRRs. As always, let me know what you think, at [email protected].