Deals makers and deal breakers

What is it that makes some deals fly and others fail? Every deal needs to be judged on its own facts. However, there is often a pattern that develops during the M&A process.

Five deal breakers

1. Lack of good compatibility between the parties; 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 seller need to understand each other’s background and business philosophy as well, 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. They may think they are but actually 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 real 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, financial equity, etc. 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.

3. Owners have an over-inflated opinion of the price of their firm. They have “heard” that firms today are going for two to three times commissions but their profit margin is only in the 15 percent to 30 percent range. The rumors are usually a case of terms that require a good deal of growth in revenues and profit in the future in order to get the top dollar or multiple.

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 and the full impact of terms on the deal.

4. 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 especially for another owner.

How to avoid: Sellers need to evaluate what it is they are really getting into and face 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.

5. 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 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. In the courting process buyer and seller must consider how the integration will take place and try to preserve the best aspects of each firm.

Five deal makers

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

2. Ideal post transaction roles. This is when the seller and buyer will be able to do what they like to do best. The role might be the ability to write accounts they could not land before, due to additional markets, other services provided clients, etc. Or, perhaps 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.

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. When both parties are straightforward about the future integration of the firms, 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 at they want. The ideal scenario is when the transition is planned and the buyer and seller remain flexible.

Summary

The difference between a successful transaction and one that falls apart is a clear understanding of the relevant facts. The use of outside experts will remove the biases and personal feelings that often cloud judgment. The making of a good deal for all parties takes time, patience and experience. Obtaining assistance with this difficult process can help insure that it is done right the first time.