M&A Deals Makers & Deal Breakers

Why are some transactions or “deals” most likely to happen or not happen? There are a number of factors that come into play and those of us in the industry call them deal makers and deal breakers.

Every deal needs to be judged on its own merits. However, there is often a pattern that develops during the merger and acquisition (M&A) process. Below are a few examples based on my experience with numerous buyers and sellers of insurance agencies from the past 30 years.

Five Deal Breakers and How to Avoid Them

1. Compatibility. Lack of good compatibility between the parties, occurs when due diligence was not done properly. For example, merging a sales and service organization might sound good initially, but in the end can lead to disaster. Buyers and sellers need to understand and appreciate each other’s background and business philosophy before closing a deal.
   How to avoid: Bring in a third party to properly assess each firm. An unbiased opinion will prevent issues overlooked by rose colored glasses. The key is for the seller to factor in how the buyer will run the business. The buyer also needs to understand and appreciate how the business was run to date and take proper steps for a smooth transition.
2. Owners are not ready to sell. The owners may think they are ready to sell and aren’t. When it comes down to the wire, they can’t pull the trigger. Some sellers are afraid to go home to do the “honey do” list. They have no real hobbies and look at selling/retiring as “dying.” We have actually had clients contract illnesses before signing the final deal.
   How to avoid: The seller needs to sit down and review everything, including selling the business, life after the sale, and financial equity. Again, outside experts can assist with this process. Unfortunately, some sellers will get cold feet no matter what, so the buyer needs to exercise patience. Selling a firm can be similar to facing death for some people. After all, the business has often been the largest part of a typical seller’s life. The key to this deal breaker is getting career counseling and having patience for the process to unfold.
3. Price. Owners often have an over-inflated opinion of the price of their firm. They have “heard” today that firms are going for two and a half to three times commissions, but their profit margin is only in the 15%-20% range. The rumors on the street are usually a case of terms that require a good deal of growth in revenues and profit in the future to get the top dollar or multiple, or the firm is very profitable, i.e., EBITDA in the 25% to 35% range.
   How to avoid: Buyers need to know what a fair price is for an agency and stick to it. Buyers should understand what price makes financial sense for them. Sellers need to educate themselves on agency value, especially their own and the full impact of the terms of deals.
4. Giving up control. Many owners and sellers like sales and often become tired of the job of managing the agency. Despite that, they are usually afraid to give up control of the firm. They aren’t sure what life will be like when they aren’t calling the shots. Most sellers have been running their own business for many years and might lack the skills or temperament to work with a partner or for a new owner.
   How to avoid: Sellers need to evaluate what it is they are getting into and consider what it would be like to work for someone else. Buyers need to provide a way to make the transition seamless, such as providing the seller with as much authority as possible, and have a clear understanding of what the seller’s “hot” buttons are.
5. No transition plan. A lack of a transition plan will make a closed deal go sour. A buyer might tell the seller that nothing will change and the seller anticipates that. However, both the buyer and seller might not have understood each other’s business model and may be kidding themselves.
   How to avoid: The seller needs to understand that things will change, and the buyer needs to realistically state that fact. During the “courting” process the buyer and seller must consider how the integration will take place and try to preserve the best aspects of the cultures of each firm.

Five Deal Makers

1. Build rapport. An automatic real connection should develop between buyer and seller. Synergy is when 1+1=3 or 4! These are the special deals when the potential seems boundless. The key is to make sure that the connection is real and not two salespeople trying to wow each other.
2. Ideal post transaction roles. This occurs when the seller and buyer will be able to do what they like to do best. The role might include things like the ability to write accounts they could not land before due to having additional markets and being able to provide new services to their clients. Or perhaps a seller wants to just service key accounts and not worry about management.
3. Resolved weaknesses. Agency weaknesses that the seller or buyer cannot solve themselves are resolved with the transaction. The ideal transaction includes complimentary strengths and weaknesses, rather than just more of the same strengths or weaknesses.
4. Effective business succession. The deal should provide the much needed perpetuation plan for the owners that they were unable to do with their own key people and/or family members.
5. Smooth transition. When both parties are straightforward about the future integration of the firms, the owners will feel that change will be acceptable and not too drastic. The seller might secure from the buyer an “office” to go to, where they can stay as long as they want. This is the opposite situation of Deal Breaker number five, when the two parties ignored that change will occur, and both sides underestimate how much, and its impact. The ideal scenario is when the transition is planned, and the buyer and seller remain flexible.

The difference between a successful transaction and one that falls apart is a clear understanding of the relevant facts. Use of a third party will remove the biases and personal feelings that too often cloud judgment. The making of a good deal for all parties takes time, patience and expertise.

Topics Mergers & Acquisitions