Minding Your Business: Key Deals Makers and Deal Breakers Today

April 17, 2017 by and

Why are some transactions or “deals,” as they are called, 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.

Compatibility. Lack of good compatibility between the parties or 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 and take proper steps for a smooth transition.

Owners are not ready to sell. They may think they are, but when it comes right down to it they can’t pull the trigger and won’t until they feel “ready.” Some sellers are afraid to go home to do the “honey do” list. They have no other hobbies and look at selling/retiring as “dying.”

How to Avoid: The seller needs to sit down and review everything: 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 been the largest part of the typical seller’s life. The key to this deal-breaker is what boils down to career counseling and patience for the process to unfold.

Owners have an over-inflated opinion of the price of their firm. They have “heard” today that firms are going for two to three times commissions, but their profit margin is only in the 15 percent to 30 percent 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 overinflated price for an agency. Buyers should understand what price makes financial sense. Sellers need to educate themselves on agency value and the full impact of the terms of a deal.

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 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 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 local authority as possible and understand what the seller’s “hot” buttons are.

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 they are 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.

#1 Build rapport. An automatic real connection develops between the buyer and seller. These are the special deals when the potential seems boundless. The key is to make sure the connection is real and not two sales people trying to wow each other.

#2 Ideal post transaction roles. When the seller and buyer will be able to do what they like to do best. The role might be things like the ability to write accounts they could not land before due to 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 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.

#4 Effective business succession. The deal provides 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. This occurs when both parties are straightforward about the future integration of the firms. The owners will feel change is acceptable and not too drastic. The seller might secure from the buyer an “office”, where they can stay as long as they want. This is the opposite situation of Deal Breaker No. 5, 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 experience.