The Miscalculation Virtually Every Seller Makes That Costs Them Millions

We know.  

Exactly the kind of hyperbole you’d expect to hear from an M&A advisor. Can’t be true.  

But what if we had the data to prove it? Data culled from analyzing more than 300 deals completed by The Braff Group. 

Got your attention?  

Good.  

Read on.

But first, some context.

Market Penetration of M&A Advisors

Since 2001 through the 3rd quarter of 2024, The Braff Group has catalogued more than 9,000 transactions completed across all the health care service sectors we cover.

Among the many data points we track for each deal, we note deals represented by an M&A advisor. While we’ve no doubt missed some, given that advisors typically promote the deals they’ve done, and one way we track activity is to scrub advisors’ announcements, we’re reasonably confident that any undercount is marginal.

So, what does the data tell us? 

Of the more than 9,000 deals identified, nearly 7,500, or 83% were unrepresented, while 17% were completed with the help of an advisor.

Now here’s a head scratcher.

Based upon data culled from the National Association of Realtors, in 2024 about 12% of residential home sales were For Sale By Owner (FSBO).¹,² 

So, for those keeping score at home, the summary data is as follows:

So, in the sale of residential property, where detailed comps are readily available, financing is typically 100% cash at close, and the average sale price is $510,000³, the vast majority of sellers engage an advisor.

But in health care service transactions, where verifiable comps are extremely hard to come by, financing is rarely 100% cash at close, and the transactions are substantially larger than residential real estate, the vast majority of sellers go it alone.

So why do we see so much more engagement of advisors in less complex and less sizeable real estate transactions than we see in the far more complex, and sizeable sale of health care service business? 

We speculate with confidence that one reason is that a successful entrepreneur may be wired to trust that the same acumen they used to build their business can be relied upon to successfully sell it. 

Then layer on top of that a fundamental – and costly – misread of the market described below.

¹The report specifies that 88% of home sales in 2024 were done through a realtor, inferring that 12% were FSBO; https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-seller. ²This figure would appear to be reasonably representative over a long period of time. According to research cited by a private realtor, “In 1981, when the NAR first started keeping track, the percentage of people selling their homes via FSBO was 15%.” https://www.rubyhome.com/blog/fsbo-stat. ³Statista; https://www.statista.com/statistics/240991/average-sales-prices-of-new-homes-sold-in-the-us/

The Miscalculation

For the most part, 

sellers believe that subject to the numerous financial, operating, marketing, and clinical attributes of a company…

buyers price businesses with similar operating characteristics (in their unique sectors) within a narrow range,

that they structure the deals comparably,

and that they paper them under similar terms and conditions.  

Furthermore, they believe that …

individual buyers are consistent in their valuation assessments across acquisition targets that have similar operating characteristics. 

How can we be so sure?

Two-part answer:

First, some context:  a considerable number of transactions completed by buyers are what is referred to as “proprietary deal flow.” That is, deals that have not gone to market and are one on one with the seller. Even when sellers do go to market on their own, they typically limit their presentation to a narrow pool of the “usual suspects” both to limit exposure and to run an easier, and more expedient, and less costly process. Hint: it’s often not easier, more expedient, or less expensive,   but more on this later.

Second, and here’s where the pedal hits the proverbial metal. What accomplished entrepreneur would think that such a narrow presentation to buyers would surface the best offer?

Well, they absolutely, positively, wouldn’t, unless they believe there isn’t a wide variation in how buyers assess the companies they acquire.

The Reality

So, is there a way to rigorously quantify the financial implications of this miscalculation?

There is – and we have.

Since The Braff Group was founded in 1998, in addition to cataloguing the valuation metrics for the winning buyer in every deal we’ve closed, we’ve also tracked every offer that fell short. Therefore, we have the data points necessary to track the variation in buyer valuations. 

Consider the illustration below.

For every deal we close, we identify the high and low offers received, calculate the percentage variation between them, and then calculate an average across all transactions. We recognize, however, that even though the buyers we work with are highly qualified (by virtue of size, financing, or previous transaction history), a skeptic might want to throw out the lowest offers as being unrepresentative. So, in addition to the high-low variation, we also calculate the variation from the high to the median of all offers received, thereby effectively eliminating the bottom 49% of proposals. We also calculate the variation against the average.

So, in our illustration on how we run the calculations, across three sample deals, the average variation from high to low, high to average, and high to median is 70%, 25% and 21%, respectively.

We’ve done this calculation across every one of the more than 300 deals we’ve completed, and the results couldn’t be clearer.

On average, the variation between high and low offers is an extraordinary 155.1%.

Even when we compare the winning bids to the average and midpoint of all offers received – figures arguably representative of buyer consensus – the variation is still 28.8% and 22.6%, respectively.

One notable caveat: A portion of the variation unquestionably occurs organically. Buyers have unique needs. They read the market and assess risk differently. Have different goals and objectives. Different resources and opportunities to realize cost saving synergies. But a lot of the variation we cite comes from the strategies we deploy to maximize value. Strategies informed by the knowledge, experience, and proprietary data The Braff Group has gained and developed over 26 years and 380 completed transactions. And yes, this may sound self-serving, but it also happens to be true.

How the Error Cascades Through the Deal Process

If the range of valuations is wide, the only way to ensure that a seller surfaces the best deal is to approach an equally wide range of buyers.

So, what happens if you don’t, as is so often the case (as indicated above)?

Negotiation becomes purely guess work. You get an offer from one or two buyers. Now what? Is it the best deal you can get? Should you ask for 10% more? 15%?

More cash at close? A better earnout – or none at all? A lower working capital requirement? Who knows? Absent a variety of proposals – at different valuations, structures, and terms – sellers lack the critical information necessary to formulate a well-informed, and broad, counter proposal strategy.

All the leverage goes to the buyer. Absent a complete vetting of the buyer universe, there’s no way for a seller to truly know what their best back up offer might be, should the first buyer stumble (and they do, far more often than you might think). Worse yet, in the case of a proprietary process where a seller is working with just one buyer, there’s no back up at all. This gives the buyer all the leverage they need to use due diligence to challenge financial performance, re-trade on purchase price, extract concessions, and demand the most favorable terms.  

Note that this isn’t a knock on buyer behavior. Their job is to pay as little as possible – and the most experienced of them are quite good at it. The seller’s is to get as much as possible. And to do so, the seller simply must know – and fully develop – all their options.

Closing often isn’t easier, more expedient, or less expensive. As suggested above, one of the other reasons sellers commonly cite for not going out to the broad market is because it’s theoretically easier, more expedient, and less costly to go direct to a limited buyer pool. Well, it might be. If you’re lucky. Because all too often, the leverage sellers give up lengthens the process, allows the deal to get bogged down in minutia, and worst of all, leaves the seller with the difficult choice of giving in to buyer demands, or, after spending all the time, resources, and money on acquirer number one, having to start the entire process all over again.

You’re left wondering. You get an offer to sell your business. The price seems good. The multiple is consistent with what you’ve heard bandied about on the conference circuit. The structure is acceptable. Terms seem reasonable. But could it be better? Much better? Especially now that you know that on average, winning buyers are willing to stretch and pay – – if they have to – – as much as 23-29% more than what arguably represents a fair deal to secure a transaction.

If you’ve only gone out to a limited number of buyers, at worst, it’s a reasonable bet you left something on the table. Perhaps a lot. At best, you’ll never know.

For the Skeptics: A Case Study

All the above notwithstanding, we imagine many of you remain skeptical. 

Exactly what we’d expect. 

So, consider this case study on an actual deal we completed.

First off, this particular company was extremely attractive and generated an extraordinary 19 offers. When we completed our own internal analysis, given its robust growth trajectory, the consensus was that an attractive offer would be approximately $45M, which corresponded to an extremely healthy 10.7 x EBITDA. And based upon an average offer of $44.8M, buyers largely agreed.

But given unique market conditions, we pitched the company at a far greater valuation. And as a result of our positioning and strategically orchestrated process, we ultimately secured a $76M purchase price. A price that was 358% greater than the low end of the range, 56% greater than the average, and an extraordinary 70% greater than the median.  

So, for the record:

Buyers do not pay the same for acquisition targets.

In fact, valuations vary a lot.

And the only way to tap into the high end of the range, is to go out to an equally wide range of buyers as part of a strategically developed and orchestrated process.

Mike drop.         

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