Mergers and acquisitions (M&A) are emotionally charged and complex processes. For sellers, selling a business often means parting with something they’ve spent years or even decades building. For buyers, acquiring a business involves integrating a new entity, new team members, managing risks, and fostering relationships—all of which come with their own financial and emotional challenges. Understanding the psychology behind these transactions is crucial for success. Below, we summarize the top psychological impacts of dealmaking from both the seller’s and buyer’s perspectives, along with practical solutions to mitigate these challenges.
The Top 10 Psychological Impacts in M&A
Psychological and emotional factors can sometimes overshadow financial considerations during M&A transactions. Addressing these emotional drivers directly can lead to more successful and smoother outcomes for both parties. Here’s a breakdown of the most significant psychological impacts and ways to solve for them:
1. Trust and Familiarity Often Lead to Bias
Most people are reluctant to change and prefer familiarity. As a result, its no surprise that the path of least resistance would be for a seller to prefer selling to someone they know and trust with the assumption that this will make the process smoother. However, this can lead to overlooking key details, not identifying the right successor, and compromising objectivity. Similarly, buyers may feel comfortable working with someone familiar but can become complacent during due diligence, blindly following the demands of the seller, or feeling that their personal relationship will offset key issues.
RIAs should approach the deal professionally, regardless of familiarity. Sellers and buyers should engage third-party consultants who can maintain objective, ensure proper due diligence, and prevent emotional bias from clouding judgment.
2. The Struggle for Control and Legacy
Sellers often fear losing control of the business they have spent their lifetime building, a change in culture and process, and may be hesitant of the change in legacy or lack of legacy that will be left behind. Buyers may feel pressure to respect the seller’s legacy while still implementing necessary changes to optimize the business.
Transparency and open communication are key. Buyers should reassure sellers by articulating plans for the business’s future, demonstrating respect for its legacy, and allowing for phased transitions where the seller remains involved for a period post-sale. Sellers can negotiate ongoing roles as advisors, asset managers, or consultants to ensure their input is valued during the transition.
3. Overconfidence in Personal Expertise
Many RIA sellers and buyers, especially those backed by private equity, who have gone through previous M&A transactions may believe they can handle negotiations alone, which can lead to costly mistakes. When either party is involved in the thick of a transaction, it is easy to overlook the unique complexities of the deal and discount red flags.
Both buyer and seller should recognize that each deal is different. Engaging experienced M&A consultants early in the process ensures critical details are not overlooked and ensure that a tactical approach is taken.
4. Fear of Change Causes Delays
Sellers may be unsure about life after the sale, delaying decisions due to fear of what comes next. Buyers may hesitate due to concerns about integrating the new business or managing new staff and clients.
It is crucial for sellers to create a personal post-sale plan, exploring new ventures, hobbies, or consulting roles to reduce the anxiety of the unknown. Buyers, meanwhile, should conduct a thorough integration plan early in the process, outlining how they will manage client transitions, staffing, and operations, thereby minimizing uncertainty and hesitation, while also ensuring a seamless transition.
5. Short-Term Thinking and Immediate Gratification
Sellers often focus too heavily on immediate financial gains and overlook long-term benefits, such as structured payouts. Buyers, eager to grow through acquisition, may rush into deals, missing long-term strategic goals.
Working through an M&A transaction will allow both parties to analyze different deal structures and help them realize the benefits or consequences of a particular deal structure. Developing a long-term acquisition strategy and assessing how deals will contribute to growth over time will also help alleviate pitfalls.
6. Limiting Buyer Pool Due to Familiarity Bias
Many advisors prefer selling to local or familiar buyers, believing this will result in a better transition. However, advisors may miss out on higher offers, better deal structures, or better strategic fits. Buyers who limit their acquisition targets to a particular network, geographical region, or niche may also miss out on opportunities that could provide greater synergies.
Advisors and RIAs should broaden their horizons. Sellers should cast a wider net by working with consultants who can introduce them to a larger pool of potential buyers. Buyers should consider businesses outside of their immediate scope to uncover deals with higher strategic value, possibly even expanding their market reach or service offering.
7. Fear of the Unknown
Sellers may be fearful of the buyer’s ability to maintain client relationships or staff loyalty, resulting in hesitation to close the deal. Buyers may worry about how the new business will perform post-acquisition and whether integration will go smoothly.
Open dialogue is essential. Buyers should create a detailed plan for client retention, employee integration, and operational continuity. Sellers, in turn, can negotiate transition periods where they remain available to assist with onboarding clients and staff, ensuring a smoother transition.
8. Cognitive Dissonance Between Retirement and Identity
Many sellers experience internal conflict between wanting to retire and fearing the loss of their identity, which is often tied to their business. Buyers who can appeal to this emotional disconnect and offer sympathy tend to be more successful post-transition.
Buyers should respect the seller’s emotional ties to the business and offer flexible transition options, such as a phased retirement plan or consulting agreements.
9. Valuation Obsession Hinders Flexibility
Sellers can become overly fixated on achieving a certain valuation, disregarding more favorable deal terms or tax-efficient structures. Buyers may focus too much on driving down the price, which can strain negotiations or lead to unrealistic expectations.
Understanding current market trends and RIA valuation will allow both parties to objectively assess the business. Sellers should work with their M&A team to understand the full financial picture, not just the headline price. Buyers should focus on the overall deal structure, balancing price with favorable terms that ensure a smooth transaction and long-term success.
10. Cutting Corners to Save Costs
Within the advisory & RIA M&A space, one can find several free “fill-in-the-blank” contracts. But while these contracts may seem like a cost-saving tool, they are often vague, offer a variety of provisions which may or may not have unintended consequences, but most importantly, these non-specific contracts focus on benefiting third-parties first, buyers second, and sellers last.
Its important for advisors to understand that cutting corners early often leads to costly mistakes long-term. Engaging in a specialized M&A team is crucial. Investing in thorough due diligence and customized contracts tailored to the specific deal will save money and headaches in the long run.
Top 5 Mistakes to Avoid in M&A Transactions
Understanding the psychological impacts is essential, but there are also common practical mistakes that can derail even the most promising deal. Here’s how both sellers and buyers can avoid these pitfalls:
1. Don’t Allow Personal Relationships to Dictate the Deal
Personal relationships can cloud judgment, leading buyers and sellers to make unnecessary concessions or be too lackadaisical with the process. Both parties should maintain professionalism, even if they know each other personally. Bringing in a third-party consultant can help keep negotiations objective and focused on the best interests of both sides.
2. Don’t Withhold Critical Information
Hiding potential issues (e.g., tax liens, legal disputes) can lead to trust breakdowns and deal collapse. Similarly, telling a party what they want to hear, but having ulterior motives in the final stretch can create distrust and negatively impact the transition.
Transparency is key. Both parties should disclose all relevant information early in the process, building trust and ensuring that potential issues are addressed before they become deal-breakers.
3. Don’t Ignore Expert Guidance
Ideally, sellers will only sell their business once! Doing so with a competent team to assist in the transaction ensures that you are well-informed about all of the options available and can make decisions based on information, not instinct. These experts can guide negotiations, identify risks, and ensure both parties achieve favorable outcomes.
4. Don’t Overcomplicate The Deal
Sellers who try to include too many complex terms early on risk overwhelming the buyer and stalling the deal. Buyers who introduce excessive conditions upfront can frustrate sellers, potentially causing them to walk away.
Both parties should start with simple, clear terms and introduce complexity gradually as negotiations progress. Keeping the initial deal structure straightforward helps build trust and momentum.
5. Don’t Delaying Seeking Guidance
Waiting too long to involve a M&A team can lead to unfavorable contract terms and costly mistakes. Both buyers and sellers should involve their M&A team early in the process to assist with vetting the other party, reviewing the documentation, assisting in meeting preparation, completing a letter of intent, and agreeing to terms. Ensuring that the right professionals are brought in at the right time helps address potential issues in real time before they become major obstacles without causing the deal to come to a halt.
Our webinar, The Psychology of Dealmaking, offers additional insights for advisors and RIAs navigating mergers and acquisitions.
Advisor and RIA M&A transactions are multifaceted, involving both financial considerations and significant emotional challenges for both buyers and sellers. By understanding the psychological impacts and common pitfalls of advisor M&A transactions — and by applying practical solutions — RIAs on both sides of the transaction can navigate the process more smoothly, ensuring a successful and rewarding outcome.
