Diagnosing Acquirer's Credibility

As a business seller, the single most important factor you have to evaluate in the potential buyer is its credibility as an acquirer — in particular, its credibility to convert a signed Non-Binding Offer (NBO) into an acquisition.

The single most important metric to evaluate the party's credibility as an acquirer is its past conversion rate of signed NBOs to closed acquisitions. Unfortunately, it is a widespread mistake not to enquire about this ratio at all.

Why the NBO stage is the most critical step

Signing an NBO and choosing the party with whom to continue to the due diligence phase is the most critical step in the acquisition process. It is the point at which you must disclose a lot of confidential information, distract management from the business operations, and often lock yourself in for a 45–60-day exclusivity period.

So, don't get blinded by the shiny high price in the offer. Also, do not rely on vanity metrics like just the number of companies bought in the past. Properly evaluate the acquirer's credibility to close the deal before you open the books and spend time engaging in due diligence.

Conversion rate of signed NBOs to closed acquisitions

Beware of parties with a low conversion rate

• More likely to engage in the acquisition process just for information fishing.
• More likely not to extend a binding offer at all due to "change in strategy".
• More likely to drag out due diligence and exhaust you with new questions.
• More likely to extend a sharply decreased price in the binding offer.
• More likely to insert draconian new clauses in the binding offer.
• Less likely to close the deal.

Originally published by our Chief M&A Adviser David Abashidze, CFA on LinkedIn