The phrase “a bird in the hand is worth two in the bush” is an ancient proverb dating back to the 15th century. It was originally rooted in the activity of hunting as a way to express satisfaction in having caught one prey, rather than pursuing two which may get away.
Today, the proverb meaning is similarly used to express that it’s generally better to be content with what you already have for certain, rather than risk losing it for something that might be better but is uncertain.
Many business owners, faced with the prospect of selling their largest asset, often feel this sense of contentment and certainty when fielding an offer for their business from a prospective buyer. Especially if that offer checks the box and exceeds expectations of the firm’s value in the owner’s head. After all, what else matters?
In merger and acquisition (M&A) deals, there are plenty of risks that can arise – but probably none greater than the risk of receiving a “good” offer without exploring the broader market.
Cognitive bias in decision making
One of the biggest reasons sellers jump at the first offer that comes in the door when selling their business involves the scientifically proven phenomenon known as “cognitive bias.”
Cognitive biases are the systematic errors in thinking that come from relying on mental shortcuts called heuristics, resulting in illogical or irrational decisions. There are numerous known biases, affecting a wide range of behaviors including decision making, judgment, beliefs, and social interactions.
Cognitive biases can affect most people’s abilities to make the best decision for themselves, leading them to favor information that confirms how they already feel. Personal experiences, emotional influences, even social factors strongly influence how people interpret information that they need to make decisions.
It’s curious how many business owners will take the long journey for making a decision on who to use as their office copy machines vendor (Canon, IBM, or Panasonic), often meeting with 4-5 different reps. Yet, when making the biggest decision of their lives – selling their business – choose to jump at the first offer, or worse, be unrepresented at the table by an experienced M&A advisor.
Why do sellers choose NOT to have an advisor help them?
Here’s a common scenario: A business owner who may (or may not) be looking to sell is approached by an interested buyer who makes an enticing offer that feels fair. Maybe even more than fair. They are excited. In many cases, the business owner thinks they may jeopardize the offer by thinking about it too long, or shopping around, or hiring an advisor. The buyer may even suggest that “this offer won’t last for long” or say they “won’t wait” for the seller to hire a consultant. The threat of losing an offer is more powerful than the possibility of gaining more by waiting. After all, a bird in the hand is worth two in the bush.
However, selling your firm isn’t the same as running your firm. What many don’t realize is, the act of selling a firm has less to do with understanding the business, and more to do with understanding the M&A process, current market conditions, the competitive landscape, and the mindset of the buyers.
In this current M&A environment, where the demand for quality firms outweighs the supply, top performing firms often hold the upper hand. (Many don’t know that.) However, the buyers in this industry are far more experienced in the process of negotiations and dealmaking, some with dozens of transactions each year. How many firms have you sold? For most, this will be probably the first and the last.
The benefits of working with an M&A advisor
As an insurance broker (and business owner), you advise clients every day – helping them find the right insurance coverage for their businesses, their properties, and for their families. You’re an expert in your field and wouldn’t recommend clients to go it alone.
On the flip side, you work with advisors all the time to help you make the best financial decisions. To make key strategic decisions for your business, to manage your retirement portfolio, to do your taxes. So, why not to sell your business?
At its highest level, the core benefit of working with an experienced M&A advisor is to ensure a deal meets your objectives and leads to the best possible outcome for you.
Here are some of the specific benefits of working with an advisor if you are considering selling your insurance brokerage:
- Better financial outcomes. Data shows that firms with experienced representation receive more money in final transactions.
- More buyers. An experienced investment bank or M&A advisory firm has a vast network of contacts and potential buyers; they know these buyers, know what they are looking for, know their negotiating style, know what their culture is like. It’s all about finding the best match for your business.
- Negotiating terms that are in your best interest. Hiring an advisor is more than just about the final price. A skilled consultant will negotiate better terms of the agreement, and ensure the partnership is a good match. Perhaps most important, a good advisor knows what terms a buyer will accept if you ask but likely not offer without prompting.
- Avoiding pitfalls during the process (and after the deal). In any deal it is not a matter of “if” issues will arise but rather “when” they will arise. The due diligence process during M&A deals is often something very new to sellers and requires the unique skills of an advisor to guide the seller through it. This thorough examination of the deal could mean the difference between tremendous success or disastrous failure of a partnership.
It’s important to understand how cognitive bias can lead people to make the wrong decision (or at the very least, not the best decision). Emotional decisions are usually the most susceptible to these biases. For business owners, the potential sale of a business can be a very emotional decision. In many cases, owners facing the decision of “a bird in the hand vs. two in the bush” can experience strong cognitive biases, resulting in a potential poor decision.
But remember, for every logical proverb there’s a completely opposite philosophy that can sound equally logical. In some cases, the proverb “nothing ventured, nothing gained” may be a more suitable approach when it comes to exploring options for selling your business.
Investment banking services in the USA offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, LLC, 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122 (440) 354-3230.
