Buy What You Need, Not What’s for Sale

In our experience, the reason a deal goes wrong is usually visible before it is signed. The most common one is that the buyer bends its strategy to fit a company that happens to be for sale. The published evidence points the same way. Regular, moderate-sized, related deals do well. Large, occasional, unrelated and overconfident deals do badly.

This eBook sets out four disciplines.

1. 01

   Decide what you need before you look. Start from the strategy, and test whether a deal would move the needle (section 2).

2. 02

   Find it before it is for sale. Map and score the whole market, so that a sale process is never the first time you see a company (sections 4 and 5).

3. 03

   Build the case with the people who will run it. Integration starts with the choice of target (section 6).

4. 04

   Keep a level head. Walk away early and cheaply, and renegotiate when the facts change (section 7).

It is written for chief executives, chief operating officers and boards of technology businesses, and for PE-backed platforms building through acquisition. Section 2 is also for readers who should not be buying yet.

The claim that 70 to 90 per cent of acquisitions fail is repeated so often that few people ask where it comes from. Its best-known source, a 2011 Harvard Business Review article, presents it as the conclusion of study after study, without naming the studies (Christensen et al., 2011).

The studies behind figures like this mostly judge large listed acquirers by their share price. KPMG’s 1999 study looked at the 700 most expensive cross-border deals of 1996 to 1998 and compared each buyer’s share price a year later with its industry. It found that 17 per cent of deals added value and 53 per cent destroyed it. The rest showed no clear change (KPMG, 1999).

The most thorough recent work also finds a high failure rate, and we do not dismiss it. Baruch Lev and Feng Gu studied 40,000 acquisitions over 40 years. They judged each one on sales, margins, share price and goodwill write-offs, and found that 70 to 75 per cent failed (Lev and Gu, 2024).

An average hides a wide spread, though. McKinsey’s M&A leaders, who study the world’s largest companies, say their research overturned the idea that 70 per cent of deals fail (McKinsey, 2020). And the studies that find high failure rates also show which deals fail: large ones, unrelated ones, and ones done for the wrong reasons (section 3).

The KPMG study also carries a warning for anyone who wants to argue with the headline figure, us included. It asked executives about their own deals, and 82 per cent said their deal had been a success. The share price said 17 per cent had added value (KPMG, 1999). People who do deals are poor judges of them.

Published evidence

Executives rated their own deals far more kindly than the share price did

The 700 most expensive cross-border deals of 1996 to 1998.

Executives’ own viewSaid their deal was a success

82%

Share price testDeals that added value

17%

So we will not offer a success rate of our own. What we can say from experience is that the deals that go wrong usually show why before they are signed. A buyer with a clear strategy, a mapped market and a level head avoids most of those reasons.

An acquisition is one way to close the gap between where a business is and where it wants to be. It needs a strategy behind it.

We start every buy-side engagement in the same place. First, plant the flag on the mountain top: where does the business want to be in three years? Then be honest about where it is today, and measure the gap. Only then ask whether buying something would close that gap faster, or more safely, than building it. The destination should stay fairly fixed. The route will change, because markets move and competitors do things you did not expect. We will cover this in more depth in a forthcoming eBook on growth strategy.

Two reasons to buy come up again and again.

• A new geography. A UK business can enter the US or Australia organically, and some do it well. But they are at the mercy of the first people they hire there. Buying an established business with a working sales team means you do not have to send your own people to learn a new market, its culture and its law. The risk moves to keeping that team once you own it (section 6).
• A product you need sooner than you can build it. When time to market is the constraint, buying a working product can be the faster route.

Then test the size. Moving the needle means adding a meaningful percentage to the buyer’s revenue or profit. Here is our rough arithmetic. Buying a business with about £1m of revenue can take three to six months of management time and £200,000 to £300,000 in fees. If it then adds £1m to £2m over two or three years to a £100m business, that is 1 to 2 per cent.

Lighthouse worked example

Buying a business with about £1m of revenue, for a buyer with £100m

Management time

3 to 6 months

From first conversation to completion.

Fees

£200k to £300k

Advisers, lawyers and diligence, whatever the size of the deal.

What it adds

1% to 2%

Of the buyer’s revenue over two or three years, if the business grows by £1m to £2m.

For a flat business that needs to show growth, that may be worth it. For a business already growing at 10 to 15 per cent a year, it can slow growth down. There is no industry rule. A small deal with a genuine synergy case can move the needle on its own.

The evidence favours companies that buy regularly and keep deals to a moderate size. Among the world’s 2,000 largest listed companies, those doing more than two small or mid-sized deals a year over the ten years to 2022 delivered a median excess shareholder return of 2.3 per cent. That beat every other approach, including organic growth alone (McKinsey, 2024). Bain finds that the worst performers over time are companies that buy rarely but make deals that are large relative to their own size (Bain, 2023). Both studies show correlation rather than cause, and both firms sell M&A advice.

In our experience, the deals that disappoint were usually in trouble before the first offer, because of why they were done.

The shiny object. A company comes to market, looks good on paper, and the buyer wants it. It is like an advert that catches your eye online. You buy the thing, it is exciting for a day, and then it sits on the shelf. You can usually spot it in the board paper. If the strategy has been rewritten so that the deal makes sense, the buyer is amending its strategy to make the acquisition work. That rarely ends well.

Hubris. Some deals happen because a senior executive wants them to. The evidence on this is unusually clear. Chief executives classed as overconfident were 65 per cent more likely to make an acquisition, and the stock market’s reaction to their deals averaged minus 0.9 per cent, against minus 0.12 per cent for other chief executives (Malmendier and Tate, 2008).

The wider research adds to the list. Lev and Gu link failure to large targets; to unrelated acquisitions, which they put at almost 40 per cent of all deals; to weak businesses the buyer hopes to rescue; and to bonuses paid for completing a deal rather than for its results (Lev and Gu, 2024). Deals done after a strong year on the stock market are also more likely to fail (CFA Institute, 2024).

You will not find any of these reasons in a financial model. One question usually exposes them: would we be looking at this company if it were not for sale?

The best defence against the shiny object is to have looked at every company in the market first.

When we run a search, we start with the whole market. We build the longest list we can, treat it as a market mapping exercise, and score every company against the client’s criteria. The result is a league table. In construction technology alone, our proprietary database holds more than 3,000 companies, and we keep it up to date.

A client’s criteria typically take that list down to about 50 companies. Working with the client, we cut it to about 20, and those are the companies we approach.

How we work

How a Lighthouse search narrows the market

1. 1

   Map and score the whole market. In construction technology, more than 3,000 companies.

2. 2

   Apply the client’s criteria: typically about 50 companies remain.

3. 3

   Agree with the client about 20 to approach.

4. 4

   Where an owner is interested, agree a letter of intent in four to eight weeks.

This changes what happens when a sale process starts. When a teaser lands, we can usually work out which company it is and see straight away how it scored months earlier. Most of the decision about whether to bid has already been made. A teaser should never be the first time you see a company.

Approaching companies that are not for sale works better than most buyers expect. Most owners take the call, for the same reason most people take a headhunter’s call even when they are happy in their job. It is flattering, and they want to know who is interested and why. The exceptions are owners who have had a bad experience before, and owners worn down by unresearched low offers from buyers fishing for a bargain. A genuine approach, with a clear reason and something to offer, stands out.

When an owner is interested, a letter of intent can be agreed in four to eight weeks. Talking to one buyer at a time gives that buyer bargaining power. That does not always mean a lower price. An approach can also prompt an owner to run a process once they see how much interest there is. If that happens, you start the process as the buyer who already knows the business.

The research supports buying private companies. In 3,135 takeovers by US firms that each made five or more bids within three years, buyers’ shares fell on announcement when they bought listed companies and rose when they bought private companies or subsidiaries (Fuller, Netter and Stegemoller, 2002). The same pattern held across 4,429 acquisitions by Western European firms (Faccio, McConnell and Stolin, 2006). The authors put it down to buyers getting a better price for companies that cannot easily be sold.

Treat claims about off-market deals with care. Private equity firms describe almost half their deals as proprietary in some way, but the researchers who asked them could not check what that meant (Gompers, Kaplan and Mukharlyamov, 2016). Bain’s study of serial acquirers in oil and gas found the best keep a running list of their top 15 to 20 targets rather than waiting for bank-run auctions (Bain, 2026). That study covers one sector only.

A sale process is a good way to buy a company you already wanted. It is a poor way to decide what you want.

A process is run for the seller. The seller’s adviser sets the timetable, decides what information you see and when, and pushes buyers to commit. If the company was not in your strategy, you now have to decide quickly whether to bid on someone else’s terms. Once you have spent money on advisers and diligence, the pressure to keep going builds, because nobody wants to have spent it for nothing. That is deal fever, and the way auctions are run encourages it.

We have seen processes work very well. In those cases, the target was a company the sector already knew, and the buyer had expected it to come to market one day.

In consolidated sectors, where good mid-sized companies are scarce and sell at a premium, that preparation lets a buyer move quickly without overpaying. We have also seen buyers acquire a company only because it was for sale, and do badly with it.

The research is more balanced than many advisers admit. Studies of large takeovers have not found that buyers lose out, on average, by buying through an auction rather than a negotiation (Boone and Mulherin, 2007 and 2008). But in drawn-out contests between bidders, the winner’s shares trailed the loser’s by 24 per cent over the following three years in the US, and by 14 per cent internationally (Malmendier, Moretti and Peters, 2018). When a competitor is in the race, let them overpay for a business plan that is thin on substance.

The deal team works out the rationale and gets the deal done. The operating team has to make it work. They are usually different people, and the gap between them is where value leaks away.

“Here you go, Bob, we’ve bought this company. Do something with it.” Integrations that start like that always end in trouble. The people who will run the business need to be in the room early. During diligence, they should test the assumptions and build the business case themselves, so they are not handed a growth plan that someone else wrote and nobody owns. Some will lean in, because customers have been asking for exactly what the deal brings. Others will not engage: they will argue they could do it themselves, or refuse to support any growth numbers. Then management has a decision to make. Either replace the person, or require their involvement. Either is better than letting it drift.

Integration also costs more than many buyers expect. In McKinsey’s work on synergies, one-off integration costs averaged 1.1 to 1.2 times the annual synergies the deal was meant to deliver. Between the 25th and 75th percentiles they ranged from 0.6 to 2.0 times. The same research notes that in technology, competition and the state of the market set the premium paid, not the synergies (McKinsey, 2020).

In a technology business most of the value is in the people, and people leave. Using US population-level data, one study found that staff who join through the acquisition of a startup leave at significantly higher rates than people the same buyer hires in the normal way. The gap narrows when staff have been with the startup longer, when the founders stay together, and when the acquired business is kept separate rather than absorbed (Kim, 2024).

That matches what we have seen of culture. You cannot paint over one company’s culture with your own.

The opposite is common. I have seen continental European businesses bought, pushed to become something they were not, and then left alone when that failed. People come in, do their hours and stop trying, or they leave. That is where value is destroyed.

Customers can leave after a deal too. Our Voice of the Customer eBook, What Customers Won’t Tell Their Supplier, covers how to find out, before you buy, which ones might.

Walking away is easier, and cheaper, the earlier you do it.

We do enough diligence up front that we rarely get far into a deal before deciding whether it is right. When we walk away, it is usually early. Once a letter of intent is signed, I cannot recall a Lighthouse deal that failed to close. It normally plays out as we expected, with few surprises. Elsewhere in the market, buyers walk away on signing day more often than you might think, after the diligence is done and the documents are drafted. We once bought a company for a client after another buyer had walked away from it at the point of signing.

The reasons we walk away are rarely complicated.

• An unrealistic valuation. We will not pay a premium based on a number someone is not going to achieve.
• Risk the seller will not own. In one deal, financial diligence found tax anomalies in the way the business had been run. Under a UK sale agreement, the seller usually gives a tax covenant, which commonly runs for six or seven years after completion, in line with HMRC’s six-year window for careless errors. It works broadly pound for pound, within agreed limits (Weil, Gotshal & Manges; HMRC). The exposure was significant, and the seller would not accept the indemnity. The seller had created the risk and wanted to pass it on, so we walked away.
• A plan the evidence does not support. Some businesses are beautifully packaged by their broker, with a hockey-stick growth curve. Then you dig in and find real risk around the numbers. Remember who has to deliver that plan. The seller leaves with the money, and you own the business. You then have to explain to your shareholders or backers why you paid a premium for it.

Short of walking away, renegotiate. If diligence shows the business is different from the one presented, say so. Change the price, the conditions or the structure. For example, pay part of the price later, against performance, through an earn-out. Experienced buyers do this as a matter of course. Our commercial due diligence eBook, Test the Plan, Not the Market, covers how to test a plan before you commit.

The pressure to finish is real. After two or three months on a deal, people are tired and want it over the line, and ending with nothing to show for the effort feels like failure. It is the right result when the facts have changed. Remember, too, how readily executives approve of their own deals. In the KPMG study, 82 per cent rated their deal a success when the share price measure said 17 per cent had added value, and fewer than half of boards had formally reviewed their deal afterwards (KPMG, 1999).

We act as an outsourced corporate development team for technology companies that have the cash to acquire but not the people to do it. That is usually a business buying for the first time or building its first acquisition programme. Some clients later build their own team. Several have worked with us for six or seven years.

For PE-backed platforms, we fill the gaps an in-house deal team leaves. That might be a business bought as a standalone asset with no M&A function, a business coming out of a turnaround that is now ready to buy, or a deal team with more targets than time. We also carry out commercial due diligence and Voice of the Customer work on targets.

The work covers the whole path: strategy and acquisition criteria, market mapping and scoring, approaches to owners, evaluation and negotiation, diligence, and integration planning from the start. A partner leads every engagement from start to finish, and our partners have run and scaled technology businesses and done these deals as buyers themselves.

About Lighthouse and the author