Why Most Sellers Pick the Wrong Buyer Before Diligence Starts
Most founders believe the highest LOI wins. The data tells a different story.
We just wrapped a process where three letters came in within eight percent of each other. The founder wanted to sign with the strategic buyer at $18.2M. We walked him through what happens next.
Strategic buyers model synergies. They build retention assumptions into the purchase price. When retention falls short during diligence (and it almost always does), the haircut comes fast. PE buyers underwrite to cash flow and comparable multiples. Family offices underwrite to lifestyle preservation and continuity. Each lane has a different breaking point.
In the research we published earlier this month (https://dx.doi.org/10.2139/ssrn.6735844), we tracked 127 lower-middle-market transactions over eighteen months. Post-LOI price adjustments averaged 11.3 percent across all buyer types. But the variance by buyer lane was the story. Strategic buyers adjusted downward in 73 percent of cases. PE adjusted in 54 percent. Family offices adjusted in 31 percent.
The founder asked the right question: which buyer are we actually prepared for?
We went back to the business and looked at what diligence would surface. Customer concentration sat at 42 percent with the top three accounts. Revenue recognition had some timing questions that would need documentation. The management team below the founder was thin.
For the strategic buyer, that customer concentration was a retention risk they would price immediately. For the PE buyer, it was a diversification mandate they would build into Year One. For the family office, it was acceptable as long as the relationships were documented and transferable.
We rebuilt the model for each lane. The strategic offer would compress by 9 to 12 percent once retention assumptions were stress-tested. The PE offer would hold or compress by 3 to 5 percent depending on working capital. The family office offer would hold if we documented the customer relationships properly.
The founder signed with the family office at $17.1M. The deal closed at $16.9M. The strategic offer would have closed somewhere between $16.0M and $16.5M after retention adjustments.
Preparation is lane-specific. The question is not which buyer pays the most on paper. The question is which buyer your business is actually prepared to close with. Most founders do not ask that question until after they have signed. By then, the buyer holds all the leverage.
The work we do with founders is not about chasing the highest number. It is about building preparedness that matches the buyer lane with the highest probability of closing at or near the price on the letter. That requires knowing which lane you are running in before the letters arrive.