Understanding Buyer and Seller Fear in M&A Process

Real estate agents say it all the time – their job is half real estate and half psychology. For many people, buying or selling a home is extremely personal and emotional. For many entrepreneurs, buying or selling a business can be just as personal and emotional (if not more so).

In this post, we want to focus on just one of those complex emotions: fear. Over the years, we’ve seen fear come up in challenging ways for both buyers and sellers. It is completely normal to have concerns, worries, or even fears about a merger or acquisition. But if you know what to expect, fear doesn’t have to be debilitating. Here are two specific situations that we watch out for:

1. Buyers and loss aversion

Nobel Peace Prize winners Daniel Kahneman and Amos Tversky completed groundbreaking work in applying psychological insights to the area of decision-making under uncertainty. They coined the concept of “Loss Aversion,” which says that the fear of losing money has more influence over the investor than the desire to make money. Because of the pain of loss, people will do more to avoid a lost than they will to maximize a profit.

Why is this critical to understand? Because if you are a seller, you need to remember that a potential buyer’s fear may be a more powerful force in his decision-making than his lust for exciting opportunities and profit. In other words, if the buyer perceives a large risk, it may outweigh a great opportunity. With that knowledge, the best way for a seller to win is to work to minimize perceived risk upfront, so that the potential upside of their business can shine. In his post, “Dealing with Buyer Loss Aversion,” Al Danto does a great job of outlining common fears that buyers often encounter and encouraging sellers to address any downsides clearly and upfront… enabling the potential buyer to be comfortable enough to appreciate the upside potential of the purchase.

2. Sellers, stress, and regret

Business leaders hold a lot of weight on their shoulders. The number one fear we hear from sellers repeatedly is “is this the right decision?” They question the timing, the details of the transaction itself, and the effect the decision will have on their employees/families/loved ones.

The good news here is that some old-fashioned planning ahead can lessen this fear significantly. Experts at the Harvard Business Review recommend a couple of great tips:

– Clarify your life’s purpose – so that you can turn to that when making major decisions

– Work on your business, not in your business – so that you can lift above the operations and think strategically both as you plan for the future and as you work through major transitions

– Plan for a sale, even if you aren’t selling anytime soon – a healthy business is often run by leaders with the end in mind

Helping sellers navigate through the emotions of a sale is a big part of what we do. If the seller is comfortable, then the buyer is more likely to feel comfortable, and two comfortable parties make better business for all involved.

If you are considering selling your business, please contact us for a confidential discussion of possibilities appropriate to your specific situation. We have direct experience helping business owners across all industries sell their businesses, as well as relationships with buyers who are interested in new opportunities. We can help you time your sale for maximum benefit.