Buy Side M&A Do’s and Don’ts in a “Show Me, Don’t Tell Me” Deal Environment

With companies going public later, interest rates potentially easing, and many organizations sitting on cash reserves, M&A opportunities are becoming increasingly attractive. However, navigating the buy side in today’s environment presents unique challenges—fluctuating valuations, evolving financing terms, and the influx of burgeoning AI companies mean there’s a lot for CFOs to weigh. The ultimate goal? Securing deals that not only align with your cash strategy but also ensure smooth integration and retain key talent. 

In a survey of finance leaders in The Circle, 42% said their primary motivation for exploring M&A opportunities from the buy side was to increase market share/expansion. The second most popular reason at 23% was to bolster product and tech capabilities. 

In a conversation with CFO|Circle, VIPs Jason Stack, Head of M&A at Stifel, and Ethan Lutske and Jack Hamilton, Partners at Wilson Sonsini, shared M&A do’s and don’ts in this macro environment, including why you shouldn’t overcomplicate the deal, why cash is king, and how to avoid deal killers. 

4 Things to Do 

Do: Clarify Why Your Company Wants to Do M&A

M&A alone is not a strategy – it must align with and support your larger business vision and objectives. Before your company considers or conducts any M&A, make sure you can collectively answer the most important question: Why? 

At the highest level, there are often two approaches to conducting M&A: strategic and opportunistic. 

Strategic Reasons 

1. It is part of a broader M&A strategy.
2. Your company is looking to ‘bulk up’ going into an IPO or financing round – to increase your market share, cash flow, revenue, or another growth metric.
3. Your company is looking to expand its product/tech capabilities. 
4. Your company wants to acquire a specific pool of talent (acqui-hire) and/or customers to fuel expansion. 

Opportunistic Reasons

1. Your company has the ability to buy a competitor.
2. Your company can acqui-hire an industry peer at a favorable price. 
3. Your company can buy a promising company in an adjacent category or with complementary tech.

Getting clear on your strategic rationale can help you make other decisions about the right deal at the right time. 

Do: Pay With Cash Rather than All Stock

In this market, sellers prioritize cash, noted Jason. 

“If I have a client who is looking to sell, it is rare that we would think about a private company that doesn’t have access to cash.” – Jason Stack, Head of M&A, Stifel

So, if a company has strong backers – such as a portfolio company of a private equity sponsor – that can count as cash.

Cash makes a deal relatively straightforward, whereas a private-to-private equity deal is difficult from a stock perspective. One reason is because you have to value both companies – theirs and yours – in the process, and one of the biggest dealbreakers is companies not agreeing on valuation. A cash purchase reduces this risk. 

Do: View Corporate Development As a Team Sport 

Depending on their size, private companies might have a corporate development (corp dev) leader, team, or function. If this doesn’t exist, CFOs may need to outsource it to a service provider, or take on the brunt of the work themselves.

While it makes sense for the finance organization to be the filter for M&A opportunities from a financial perspective, the rest of the working team really depends on the primary motivation for the acquisition. For example, if the primary motivation is acquiring technology or intellectual property,  your Chief Product Officer should be a major part of the decision and strategy. They are best positioned to know what the company is looking for in adjacent and complementary products. Similarly, if acqui-hire is the goal, your Chief People Officer should be on the working team to consider the cultural and workforce planning impacts of the deal. 

Sourcing a company that you want to buy is only the first step. To actually get all of the work done, there needs to be a team effort across product, engineering, legal, HR, and finance. Each department head should evaluate the acquisition target and then be responsible for integrating their respective elements of that company into your company. 

Because CXOs all have intense “day jobs” that leave little room for the litany of tasks in an M&A deal, it helps to have a senior project manager whose job is solely to push the deal forward internally. Ideally, they are an ex-investment banker or an operator who has  done M&A deals before and knows how to keep the momentum up. They need the credibility to get everyone in the room to make their respective decisions and keep the ball moving forward. As one CFO put it, “think about the execution of the M&A like a triangle: the three points are corp dev, product, and the project manager who acts as a ‘quarterback’ through the process.”

Do: Use Your Data to Tell Your Company Growth Story

As for the macro conditions, Jason says the capital is out there,but the biggest thing holding back deals is the valuation spread between buyer and seller. “That delta has been slowing things down,” said Jason. 

The ingredients are intriguing from Jason’s vantage: The private equity community has capital they need to deploy, valuations are more in line with reality than four years ago, and pitch activity is higher than it has been in a while. 

To get a deal done in this environment, Jason emphasizes a company must show, and not tell. “In 2001, I could tell you a story about what’s coming on the horizon and you would give me some credit for it,” he said. “Now, it is all about looking in the rearview and proving consistent performance with real data, and translating realistic expectations for what’s coming ahead.” 

Companies with real revenue will do well, and can likely price themselves at a multiple of revenue. Companies that tried to wait out this “IPO Purgatory” period might be running out of runway and forced to cash out. 

“I’m seeing more companies who might not have sold six months or a year ago now looking to sell,” said Ethan.

Don’t: Overcomplicate the Deal

Most CFOs do not conduct M&A on a regular basis. For those who haven’t done a lot of M&A, Ethan stressed you want to “curb your impulse to make things overly complicated.” 

“A lot of CFOs build very complicated models and include things like what a 10-year earn out would look like. Don’t do that. M&A transactions are hard enough as is, and you want to come up with a simplified model that both parties can actually execute pre- and post-close, rather than getting too deep in the weeds.” – Ethan Lutske, Wilson Sonsini

Don’t: Enter the Letter of Intent Stage Unless You’re Confident the Deal Will Get Done

In this distressed deal environment, Jack says traditional valuation metrics are “kind of being thrown out the window” and the parties are coming up with terms based on their company size and what sounds good on paper. 

So be extra careful about who you negotiate with and what you share with them, especially if both companies are similar in size.

“In this kind of macroenvironment, it’s not abnormal for companies to be sniffing for blood in the water. But lately, we’ve had several deals where both companies are bleeding out financially. These negotiations have allowed the seller to see that the buyer is in a similar state, which compromises leverage for the buyer.” – Jack Hamilton, Partner, Wilson Sonsini

Because of this, Jack cautions against entering the Letter of Intent stage unless you are absolutely certain that you are going to get the deal done quickly. “There is something to be said for keeping your cards closer to the vest these days than you otherwise would have, so your industry peers can’t see that you are in bad shape, and then back off of a deal,” said Jack. 

This knowledge could then turn the tables and cause the target company to attempt to acquire your business instead, because they know how you are really doing. 

Don’t: Miss Your Numbers During the Deal Phase 

One notable deal killer can be missing numbers during the negotiation period. For example, a quarter turns out differently than projected, or there is a big, unexpected customer retention loss. “Missing numbers is a colossal failure in this process and it causes everybody to want to think more about the deal,” said Jason. 

The VIPs recognized there is a fine line between exciting the buyer with optimistic projections and missing that number. One idea is to “straddle” two quarters. Average your big wins out across quarters, so one quarter does not look amazing and the next looks like a big miss. Instead, the quarters will show upward momentum and growth because you have cascaded the wins. 

Other common deal breakers our VIPs said to watch for include companies failing to own the IP they say is in their name, failure to have regulatory compliance (especially around privacy and data security), and failure of the buyer to obtain financing in time. 

Don’t: Have a Synergy Bias Towards Your Company

The default for fiance leaders buying a new company might be to look for cost synergies only from the acquired company. But the VIPs noted that, at the board level, directors will look for synergies not just in the target, but also from your company’s side. 

“People have a bias towards retaining their own costs and cutting the cost of the target company. Board members want you to check that bias and show where cost reductions can come from on both sides.” – Ethan Lutske, Partner, Wilson Sonsini

The Takeaway: 

Buy side M&A is complex even under the most favorable circumstances. By having a keen understanding of what to do during a deal, you can better position your company to enter into transactions that support your cash strategy and ensure your company comes out bigger and stronger. Equally as important, by not making common M&A mistakes, you can protect your company and manage the many risks associated with an acquisition.

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