Common M&A Mistakes: 7 Reasons That Founders Leave Money on the Table

Most founders fixate on the multiple, but that’s just one part of the equation. You also need to maximize EBITDA and be able to defend it, and a sellside QofE helps you do exactly that. Without it, you can’t be confident in your EBITDA, and therefore can’t credibly market your true value. This becomes especially important when private equity raises debt to fund the transaction, since the amount they can borrow is typically based on a multiple of your adjusted EBITDA. If your EBITDA is understated or unsubstantiated, the buyer may push for a retrade, resulting in a much lower offer.

QofE can also prepare you for just how much scrutiny buyers will apply during these deals. When private equity raises debt for their portfolio companies, they aren’t just adding back a handful of items like an owner’s salary or a company car; the list of EBITDA adjustments can be two or three pages long. A proper QofE helps you uncover and justify all the necessary adjustments before a buyer finds them first.

M&A Mistake #3: Accepting a “Market Average” Multiple

“When someone is just comfortable with that average multiple quoted in the market, they’re not really maximizing their value. You want to find the best-fit buyer; that’s who will pay a premium.” – Jay Founders often hear what “the market” is paying and assume that’s the best they can get, but that’s rarely accurate. The market multiples you hear about are just the median values, a safe middle-of-the-road estimate that may be easier to secure. To optimize multiple values, you want to think less about market averages and more about strategic positioning. It may take more research and legwork, but the payoff can be a several-times increase in EBITDA multiple. Accomplishing this requires a three-pronged approach:

1. Identify the specific strategic value of your business
2. Find buyers who require that value
3. Create competition among those buyers

To start, you want to determine what your company offers that sets you apart. This could be your customer base, proprietary tech, talent, geographic presence, or anything else that creates strategic value. After that, you source buyers who don’t just want that value, they need it to meet their own growth goals. Once you have multiple buyers on the line, valuation multiples will naturally climb. Yes, this takes a bit longer, but when the difference can be millions of dollars, it’s worth it. As Jay explains, “Founders will settle for a 7x multiple because someone told them that’s the standard. We have seen those businesses trade for 10x or more with the right buyer.”

M&A Mistake #4: Failing to Plan for Taxes Early

“The government is effectively a third business partner you have to pay. The earlier you start planning, the more you save. If you wait until the LOI, it’s already too late.” – Jay

Many founders zero in on valuation and the final sale price but overlook one of the largest drains on net proceeds: taxes. According to Jay, founders can lose 20-35% of their sale proceeds or more to taxes alone. Fortunately, this loss can be mitigated with early tax planning.

One of the best strategies to use is the Qualified Business Stock (QSBS) exclusion. Under IRC section 1202, business owners who qualify can exclude $10 million or more from federal capital gains taxes. There are other strategies that take less time but are also less impactful such as implementing a cash balance plan as part of the retirement savings, or setting up a charitable remainder trust etc. All strategies that can save hundreds of thousands in taxes. But strategies like this are only possible with a healthy amount of lead time. Still, Jay says this doesn’t stop founders from trying when it’s far too late. “We’ve had founders come to us with only six months left before they want to sell, and at that point, there are only a limited number of tactics that we can apply. Once the transaction process starts, your options are basically gone.”

M&A Mistake #5: Trying to Run the Deal and the Business at the Same Time

“The number one negotiating strength that a seller has is that the business continues to perform well. If a business continues to hit it out of the park, every buyer wants to buy that company.” – Jay

Founders are often tempted to stay hands-on in every aspect of their deal, but this is a recipe for burnout. Trying to manage complex M&A tasks while running day-to-day operations typically results in a failure to do either effectively. And as business performance goes down, so does your value. This can pull your deal into a death spiral. If a buyer sees revenue growth slow, that gives them a reason to push for a retrade. Then, you’re negotiating from a position of weakness. Before you know it, you’re selling for far less than your company’s actual value, or scrapping the deal altogether.

The best way to maximize return is through division of labor. The fact that your business is positioned to sell for a premium is proof that you’ve already done the hard part. Your job now is to focus on protecting that momentum, not to take on more responsibilities. Having a dedicated M&A team takes care of the slow, methodical work of buyer sourcing, due diligence, and value calculation, allowing you to focus all your energy where it matters most.

Jay makes it clear that the last leg of the marathon can be the most important. “To have the most leverage, founders should aim to deliver the best results in the last six months. If they focus on the transaction itself, they get fatigued, frustrated, and exhausted. And when you’re exhausted, you’re not going to be able to negotiate.”

M&A Mistake #6: Letting Emotions Drive Negotiations

“Selling is an emotional endeavor. Founders have grown their business for 5, 10, maybe 20 years, so it’s understandable they get emotional. But the biggest enemy in negotiation is emotion. The person who wins is the one who looks at everything objectively and isn’t burdened by pride, ego, or sentiment.” – Jay

Founders are proud of the company they’ve built, and rightly so. A passion for their business is often what fuels their success. But during a sale, that same passion can become a liability. M&A negotiations are high-stakes, high-stress, and full of moments that can cause even the most reasonable person to fly off the handle. Whether it’s a disappointing offer, a late-stage retrade, or a buyer’s lack of tact, there are plenty of opportunities to get angry. But when founders take these situations personally, they risk undermining their own deal and walking away with nothing.

That’s why Jay suggests letting advisors handle negotiations. A good M&A advisor can serve as a buffer, absorbing difficult conversations and filtering out distractions. They’re able to act in your interest and advocate for the best possible terms without the emotional weight that leads to anger, fatigue, and error. Without that layer of protection, even a momentary lapse in judgment can derail an otherwise strong deal.

M&A Mistake #7: Choosing an Advisor with Aligned Incentives

“We choose an hourly model because it lets us give objective advice, even when it’s not what the client wants to hear. A success fee makes that nearly impossible.” – Jay

At first glance, the traditional success fee model sounds founder-friendly: The advisor only gets paid if the deal closes, so they are motivated to get it done. The problem is, these models reward speed, not quality. They incentivize advisors to rush deals to close, even if it means settling for subpar terms. This makes it impossible to know whether an advisor is making decisions that actually benefit you, or just telling you what you want to hear to secure their payday.

There is also no incentive to optimize on deal terms that are not related to the headline value. For example, in a $10 million dollar deal that pays a ton of taxes vs. a $10 million dollar deal that pays very little taxes, the advisor’s success fee would remain the same. There is no incentive to put in the extra time and effort to structure and negotiate a transaction that would net a better tax outcome for the seller. It’s no wonder that most middle market M&A deals are structured as an asset deal, which is the least favorable to a seller.

Success fee advisors are also paid on the full value of the earn-out at closing, no matter what. Even if the seller fails to reach full earn-out, the advisor still keeps their fee. This helps explain why so many sellers fall short of their earn-out targets. Why spend the extra time and effort to structure an earn-out with a high degree of achievability when the compensation is the same? Instead, success fee advisors will dangle a large earn-out, even if it’s not realistically achievable. In the end, they put in less work and make more in fees while the seller never sees the full value of the deal.

We firmly believe the better approach is to work with advisors who bill hourly. Without the pressure to close at all costs, they are free to speak their mind, even when it may create friction. Hourly advisors are also accountable for how they spend their time, so they have to show how each step adds value to the final deal. There is no minimum commitment or tail period. Success-fee advisors, on the other hand, are more likely to focus on “streamlining” the process (i.e., cutting corners), leaving you holding the bag once they’ve collected their check.

How To Avoid Making Common M&A Mistakes

Knowing the common mistakes founders make can be helpful, but it doesn’t make the process any less perilous. With over 70% of M&A deals estimated to fail, success hinges on preparation, expertise, and consistent follow-through.

The most effective way to avoid unnecessary mistakes is to find the right M&A advisory firm early. These firms will have the financial analysts, QofE specialists, tax strategists, and M&A advisors you’ll need to carry a deal from initial strategy through marketing, due diligence, negotiation, and closing.

Many founders want to take care of everything themselves, and that’s understandable. That same sense of drive is what helped them build a great company in the first place. But most deal-killing errors happen when founders try to run a deal and a company simultaneously. They shift all their attention away from running their business to the sale, hurting performance at the exact moment it matters most. And, because they often lack experience in structuring a deal or handling the finer points of the sale, they miss critical details. The result is almost always lower valuations, higher tax bills, and failed closings. The smart choice is to stay focused on your growth while a dedicated team works in the background. You stay in control, reviewing updates and making key decisions, but without having to bear the entire burden by yourself. And the result? A deal that fairly compensates you for all the time, effort, and risk it took to build something great. As Jay puts it:

“For a successful M&A transaction, you have to surround yourself with an all-star team. That’s how you get a blockbuster outcome.”

Takeaway

Most founders only go through the M&A process once, so it’s important to recognize and avoid potential mistakes. According to Embarc founder Jay Jung, the most common M&A mistakes include:

1. Waiting Too Long to Start: Selling a business is like training for a marathon. If you want to do well, you need to start preparing 18-24 months in advance.
2. Failing to Get a Quality of Earnings (QofE) Assessment: QofE supports your EBITDA valuation and strengthens your negotiating power. Without it, buyers will define your value on their terms.
3. Accepting a “Market Average” Multiple: Your buyer criteria should not be “anyone with a pulse.” Determine your business’s strategic value and find who needs it most, because that is who will pay a premium.
4. Failing to Plan for Taxes Early: Taxes can consume over 30% of your deal profits. With early planning, strategies like QSBS can save you millions.
5. Trying to Run the Deal and the Business at the Same Time: Taking your focus off operations to manage a deal can hurt performance, which hurts valuation. Division of labor is key.
6. Letting Emotions Drive Negotiations: Passion builds businesses, but it can kill a deal. An objective, skilled advisor can act as an emotional buffer during negotiations.
7. Choosing an Advisor with a Success Fee Model: Success fees encourage speed over quality. Hourly models mean that your advisor won’t rush a deal or tell you what you want to hear just to collect their check.

Many M&A deals fall short of expectations or fail altogether. For the best chance of success, an M&A advisory team is essential. An experienced advisory firm can take care of buyer sourcing, due diligence, tax planning, and every other aspect of the transaction so you don’t have to. That way, you can stay focused on running your business while your advisors work behind the scenes to help you secure the best deal possible.

The best way to avoid M&A mistakes is to start planning your sale early. Contact Embarc Advisors to get started now.