Deals Makers & Deal Breakers

There are several factors that come into play when transactions are in process, and those of us in the industry call them deal makers and deal breakers.

Why are some transactions or “deals” most likely to happen or not happen?

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. This article comes from 35 years of personal experience working with numerous buyers and sellers of insurance agencies

5 Deal Makers

• 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.
• 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.
• Resolving weakness. Agency weaknesses that the seller or buyer cannot solve themselves are resolved with the transaction. The ideal transaction includes complementary strengths and weaknesses, rather than just more of the same strengths or weaknesses.
• 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.
• 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 No. 5 below, when the two parties ignored that change would 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.

5 Deal Breakers and How to Avoid

• Compatibility. Lack of good compatibility between the parties occurs when due diligence is not done properly. For example, merging a sales and service organization might sound good initially, but in the end it 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 being 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.
• Owners are not ready to sell. The owners may think they are ready to sell but aren’t. This happens when it comes right down to the wire and 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. The key to this deal breaker is getting career counseling and having patience for the process to unfold.
  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 like facing death for some people. After all, business is often the largest part of the typical seller’s life. The key to this deal breaker is getting career counseling and having patience for the process to unfold.
• Price. Owners often have an over-inflated opinion of the price of their firm. They have “heard” today that firms are going for 2.5x to 3.5x commissions, but their profit margin is only in the 15% to 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 and/or the firm is very profitable–i.e., EBITDA in the 25% to 35% range.
  How to Avoid: Buyers needs to know what a fair price is for an agency and stick to it. Every once in a while, a buyer will pay an over-inflated price for an agency. 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.
• Giving up Control. Many owners/sellers like sales and often become tired of management of 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 work for a new owner.
  How to Avoid: Sellers need to evaluate what it is they are really getting into and future pace 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 to understand what the seller’s “hot” buttons are.
• No 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 looks forward to that promise. In those cases, 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 buyer and seller must consider how the integration will take place and try to preserve the best aspects of the culture of each firm.

Summary

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.