2025 M&A Lessons #4 - Check Your Emotions at the Door, But Bring Your Emotional Intelligence

“Yes, that [SIX FIGURE DOLLAR AMOUNT] was erroneous and our error, but Denzel and [the Cadet Legal team] should have picked up sooner.” – a Seller in a deal we eventually closed for our BUYER client in 2025.

This is the opening line of an epic crashout we received from the Seller a few weeks before a closing last year. What was he reacting to? Our top-tier QOE/financial diligence colleagues had just uncovered a glaring overstatement of working capital (an-often contentious deal term). That error meant a substantial decrease in the purchase price. We were representing the Buyer in this transaction (an acquisition of the Seller’s professional services firm).

The attempt to lay blame on Cadet Legal in the above scenario was shocking on multiple levels. First, the seller admitted that a mistake in his own financials existed and that it was his (Seller) team’s error. That should have been the end of the story. Instead, and worse, the Seller had the nerve to lay blame for the error on the Buyer’s side. Lastly, he attempted to blame the Buyer’s legal team (us) for this accounting or financial due diligence issue.

We politely reminded this Seller that his financials were his responsibility - no one on the Buyer’s side had a hand in running his business or preparing his financials. Further, we owed this Seller nothing other than our professionalism (which we maintained). We represented the Buyer and not this Seller in any capacity. Lastly, sir, we’re legal counsel, not accountants.

This situation highlights an important and unique feature of lower middle market (LMM) M&A. This aspect of LMM deals isn’t financial or legal, but it directly, dramatically affects both legal and financial considerations and the ultimate success of an acquisition.

Emotions. Deep emotions. Emotions so deep that characterizing this variable in LMM deals as “sentimental value” does not do it justice.

Our senior team members and some of our clients bring training and experience from big institutions and huge deals. This background provide some advantages in dealing with the much smaller transactions down in the lower middle market. One is a different understanding of “grind,” something we’ve discussed elsewhere.[1] But other key benefits include being able to pull structures and concepts from big deals and apply them to smaller deals. This comfort with structure and digging deep for simple solutions to complex problems often allows us and our clients to navigate/get comfortable enough with small deal risks to close a transaction even where others might not be able.

What big institutions and big deals cannot prepare you for is the extent to which emotion tends to get involved in LMM transactions.

One of entrepreneurship through acquisition (ETA)’s most compelling draws is that it affords an aspiring entrepreneur the chance to buy a dependable, home-grown, mom and pop business with years of history and financials. This selling point is compelling because it suggests (albeit erroneously) a small business acquisition exposes you to less risk than you would face in launching a completely new, innovative venture.

But the solid, built-from-the-mud ethos of ETA transactions also can work against the eager Buyer. These are businesses into which the Sellers (individuals and their families) have poured years of their time, energy, emotion and, at times, literal blood, sweat, and tears.

The Buyer thinks they are simply pursuing a financial promising business opportunity – the initial financial stats, geography and industry all tick boxes on the Buyer’s list of search criteria.

In reality, the Buyer is trying to adopt someone (the Seller)’s baby. The terms (financial or otherwise) under which that Seller is going to part with its baby are often higher (and more in flux) than a Buyer might expect. This phenomenon is known in psychology/marketing as the “endowment effect” (overvaluing what’s yours just because you own it).

The sale of a family built/operated business is not just business. It is personal. Due to the endowment effect (and often bolstered by a broker’s enthusiastic projections), Sellers often have become emotionally anchored to a specific high valuation. Valuation then is not simply an exercise in arithmetic. The purchase price does not just represent a multiple of an objective financial performance measure.

For many Sellers, that valuation also represents the culmination of their life’s work, the value of their legacy, and security (securing their retirement, financial freedom). And, the closer the deal gets to the finish line, the more likely the Seller has already started spending their windfall from the sale. Even when they have not started spending literally (which isn’t uncommon), they at least start spending in their dreams – on vacations, on paying off debt, on buying new toys like Escalades (real seller in another deal).

You want to enter the fray of lower middle market acquisitions? Then you have to be willing to check your own emotions at the door, and not to react emotionally when one of the parties to the transaction lashes out unfairly. That's the minimum. But in our experience, you need to go a step deeper to be successful. By taking the time to understand the emotions and incentives at play in a deal, not only will controlling your own emotions be easier, but you’ll better be able to navigate your transaction to a successful closing.

The relevance of the emotional factor will make more sense when we start talking about diligence and post-closing integration.

Stay tuned for Lesson #3. Read the previously released Lesson #5 ("Being a Smart Business Owner or Business Attorney ≠ M&A Ready") here.

Disclaimer. The contents of this article should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Your viewing and/or use of the contents of this article do not create an attorney-client relationship with Cadet Legal. The contents are intended for general informational purposes only, and you are urged to consult with counsel concerning your situation and specific legal questions you may have.