How to Get Stuck in Analysis Paralysis

Buying the RIGHT business means understanding the numbers in a business before making an offer, but you can get stuck in analysis paralysis before you ever get to the deal making table.

I know first hand how easy it can be to fall into this trap - several of my first deals wasted months of my time trying to find every detail in order to make the right decision.

We'll explore some of the most common pitfalls in reviewing deals and some helpful ways to avoid them.

Analysis Paralysis

-A situation where an individual or organization is unable to make a decision due to overthinking or excessive analysis of data and options.

Entrepreneurs may miss out on valuable opportunities because they spend too much time analyzing potential ventures, evaluating and re-evaluating decisions can lead to mental exhaustion, and if unchecked, can spill over into post-acquisition business development issues.

It is difficult to have a comprehensive understanding of a businesses value, liabilities, and operational risk without reviewing the Profit and Loss Statement (P&L or Income Statement), Balance Sheet, and Statement of Cash Flows, however it will be uncommon to receive all but the P&L or tax statements prior to due diligence.

This leaves many new to buying businesses uncertain of risks and unsatisfied with the limited evidence before being comfortable with making an offer. Often the result is a barrage of questions to the broker or seller and the inability to decide if it is the right time to submit a Letter of Intent (LOI).

In the worst of these cases, a buyer will never have all of the information needed to understand the business and it’s apparent value - they will be stuck in analysis paralysis; looking over the same details continuously and letting too much time pass.

This will most likely kill the deal with wasted time and another buyer stepping in, or by disqualifying themselves; showing their inexperience and inability to make a decision to the broker or seller.

What is enough information?

So, how much info is enough to make an offer (submit an LOI) and how much is too in the weeds prior to due diligence?

Taxes or P&L Statements - Tax documents can often be more revealing than a P&L alone, but more time consuming to prepare side-by-side comparisons for 3 or more years when line items are inconsistent. The standard acceptable level of financial statements is the latest 3 years of P&Ls.

From here you should be able to inquire with a few rounds of questions, and potentially a meeting with the seller, before making a decision on price and desired deal structure. As long as the business is profitable and meets your deal criteria, you should have enough information to either pass on the deal or make an offer.

Learning to spend less time before saying “no” and passing on an opportunity takes time - but it will save you wasted hours, days, and even months once you master the skill.

The Critical Analysis (Minus Paralysis)

In each of the deals I review I take time to key in on specific areas in order to make sure I’ve checked all my criteria for the Deal Decision Tree in at least Stages 1-2 and up to Stage 3.

If the financial statements show a strong business take the next steps in review and these simple guidelines to determine a fair offering price that you can speak to during negotiations.

Know your industry:

1. EBITDA Valuations for similar companies (HVAC example multiples)
2. What is the high range, and what qualities do the higher valuation ranges possess? e.g. An RME, a management team, diversified contracts that make up a significant portion of the recurring revenue, enough staff to reduce key-man risks, a growing market, low competition, etc.
3. What would a lower range company look like?
4. Which range does your target most likely fit in to, and is it in line with seller’s expectations?
5. Know the license requirements, industry experience needed, and market share available

Know the numbers:

1. 3-5 year P&Ls and/or Taxes (plus ytd P&L if available)
2. Focus on specific numbers, don't get lost in the weeds.
3. 2-3 years is enough to get started, put them side by side in a spreadsheet and look for trends, red flags, and calculate relevant ratios.
4. If available, use a balance sheet and statement of cashflows to provide greater insight
5. If the seller or broker has provided an SDE calculation, see if the add-backs are reasonable and qualified.

Know the Risks:

1. Obvious Liabilities and Debt
2. Operational Risk in the form of heavy working capital or low maintenance costs with equipment heavy businesses
3. Key man risks where the owner is the face of the business, the owner/operator maintains the required license or certificate, or unknowns about a single manager’s ability to operate without the seller’s direct involvement.
4. Real estate - lease expiration, environmental,
5. Contract or Customer Concentration
6. Personnel Issues - risk of employees leaving post-close

Sellers won’t always provide enough information in the first round - ask some questions or if possible, set up a meeting with the seller.

A meeting with the broker is a good first step too - keep it friendly and ask open questions that show your knowledge of the subject and industry; and then SHUT UP and let them talk. The goal is to get them openly talking so you can learn enough without getting their guard up.

Make an Offer

You can keep looking at all the numbers, have everything the seller can provide, and still get stuck trying to “make the deal work”.

It’s either a good deal or a bad one.

Think back to how an offer will fit your deal box:

1. What cashflow do you need to run this business after debt service and hiring operator?
2. What daily, weekly, or monthly time commitment can you contribute to the business?
3. What cash flow do you need to leave your W2 (if that is the immediate goal)?

Make an offer that works for you even if it’s below the seller’s expectations, explain why you’re offering that price to the seller or broker, and if they cannot meet on common ground you can tell them thank you and walk away. It doesn’t mean “no” forever, so check back in after a few weeks or months and see if they’ve had enough time to let the reality of your offer simmer.

Informed Offers - Offering a price when sufficient initial information has been provided to assess the businesses true value compared to the asking price.

Blind Offers - Offering a price based on limited information. This can be the right option when the business is in a competitive industry or location.

Call for Offers - A seller or broker solicits offers for an acquisition without listing a sale price. This approach invites potential buyers to submit their bids or offers for the property or asset, allowing the seller to evaluate the various proposals and select the most favorable one

The deal might be gone, but that’s ok - there are always more businesses to buy. Don't over-leverage yourself into a deal where your ultimate goals are not achievable.

Quick Announcement!

This month I’ll be releasing our “Serious Buyer’s Playbook” completely free! This guide will help you build credibility and instill confidence in sellers and reveal key steps in positioning you as a serious, qualified buyer.

Avoiding Paralysis

I have seen many examples of analysis paralysis from any number of perfectly intelligent professionals looking to buy their first business. I was even guilty of this early on in my search!

It is a significant investment, not unlike buying your first home (which is becoming less common) - fear of losing that investment often causes even the most savvy to hesitate.

What else can you do to avoid falling into this trap like so many others?

• Set clear objectives by using the Deal Decision Tree.
• Set deadlines for a realistic review, response, and offer timeline to stay focused on the acquisition without letting emotions decide the outcome.
• Focus on the P&L and key financial metrics to understand profits and financial risks
• Decentralize Decision-Making by reviewing your deal with other M&A professionals, by building a deal team, joining a professional community, or working with a one on one coach (like me!)
• Embrace Imperfection by learning to stand firm to your deal box, goals, and specific timelines. No decision will be perfect and that taking action is often better than waiting for the perfect solution.

"Do not let perfect become the enemy of good. " - Voltaire

If you find yourself getting stuck in Analysis Paralysis you may be happy to know that I can help! Let me review each deal with you and show you how to buy the RIGHT business with 1 on 1 coaching! When you're ready, let's get in touch with a quick, FREE session to understand how we'll tackle your business buying strategy together.

It is important not to rush into a deal lightly, but understand when you must turn over every stone and when you must be strategic. The more deals you review, the more confident you'll become. Get out there and start searching for the RIGHT businesses today!

The timing and available information for each deal will vary - know when to move forward and when to move on.

And as always - here's to your lasting success,

Sage Price