With all the pressure on the independent agency system for merger-and-acquisition (M&A) activity, due to aging principals, lack of new talent entering the business and the failure to implement succession plans on one end — and the growing appetite for agencies on the part of large brokers and public companies, hedge funds and banks on the other end, why aren't there more successful transactions?
Why do some deals disintegrate during the negotiation process or simply blow up almost at the point of closing, after so much wasted time, money and effort?
The number of M&A deals during the last few years has increased, but the supply and demand so apparent in the marketplace is not even close to reaching its potential.
Contributing factors to deal disintegration
What are the major factors that contribute to many deals not closing as the reality of the transaction looms? I decided to dig deeper beyond the traditional issues, like price, to find problems that can't be overcome. Here are just a few of the contributing factors:
Lack of planning and preparation for the inevitable exit every business owner must face. An owner suddenly decides that it is time to sell or merge (pick one), starts talking with other owners he/she knows about exploring the possibility of getting together. Or, another option: Engaging a consultant, committing to a substantial engagement and success fee, and, without much homework on the owner's part, expecting the consultant to put it all together in a nice neat package.
Not understanding the basic fundamentals of how deals are made and what options might be best, even before engaging a consultant's professional advice. And the very first fundamental to know is, what is the value of the business in the mind of the owner? How did they arrive at that value?
Not paying attention to the difference between a stock deal vs. an asset sale and the tax implication of each transaction. Some owners don't know the differences between an LLC, a regular Corp or a Sub S Corp.
Having no basic benchmark information to show the business’ revenue growth, profitability per employee (spread), expenses per employee and other trends that measure the agency against industry peers and to itself. So many agency owners mean to do this, yet never get around to it.
Not understanding in advance — beyond price — the terms and conditions, financials, tax implications, employment contracts, payment formulas such as earn-outs and potential claw-backs, and how these factors eventually determine the ultimate purchase price.
Not having a crystal-clear vision of why you want to sell, merge or buy and not setting a specific deadline to make it happen.
Not comprehending the importance of due diligence, and why ignoring or delaying this process will inevitably come back to bite you.
Failure to have a clear insight and thorough understanding of at least these factors — and there are many more — will generally lead to a deal never happening. And when the deal does blow up, the parties almost always point to the details of the deal — the fundamentals that were wrong or the price that couldn't be agreed upon or some things that were “just not fair.”
Yes, these are the excuses most often expressed when deals blow up. Excuses, maybe. But not reasons.
When I decided to dig deeper beyond the usual excuses I did so because I was convinced that these excuses were not really the actual reasons that cause most deals to fail.
The real reason is usually human failure placed squarely on the shoulders of the owner (seller or buyer).
Emotions can become overwhelming
The simple failure to avoid thinking clearly about the life quality issues to deal with after the transition closes could strike fear in the heart of the owner when he/she realizes the emotional stress caused by the uncertainty of what will happen afterward. So to get the opinion of others who had substantial experience with M&A, I reached out to an attorney and to the CEO of an investment advisors/wealth management firm for their input and observations.
According to Patricia C. Delaney, Esq. (firstname.lastname@example.org), an attorney with Lamb & Barnosky LLP in Melville, N.Y., who has M&A experience with both private and public companies, including bank-owned insurance agencies and joint ventures, the emotional feelings of the seller can become overwhelming and the owner may not be ready to “give up his/her baby” nor actually be ready to retire.
Suddenly, the seller is faced with reality: What will happen to employees? How will customers be treated by the successor? How will he/she deal with being an employee if committed to staying on during the buy-out period? What will happen if there were production or earn-out commitments that were not met or the effect of a claw-back or purchase payment reduction? And sometimes, “What am I going to do with all the money, let alone myself?” “Will I lose my identity?”
3 reasons for unsuccessful deals
I spoke with Morley Goldberg, president/CEO of Dumont and Blake Investment Advisors LLC (mgoldberg@dumont&blake.com) in Princeton, N.J., who shared his own attempts at M&A. He cites three critical reasons for deals not concluding successfully:
Seller's remorse — having second thoughts just when the deal starts to close, not necessarily because the fundamentals of the deal were not sound, but because of the uncertainty of what the future looks like.
In the interest and excitement of “doing the deal” avoiding and not facing up to those issues that could possible kill the deal and putting them off until the end — when the deal is ready to close — will actually do just that: Blow up and kill the deal.
Not having a grasp on the need for a detailed integration plan to allow for a smooth merger or transition.
Both agreed that the life quality issues and the failure to think them through are just as important, if not more so, than the financial and fundamentals of the deal, and the failure to consider carefully the kind of life to expect to have afterwards should be given as much thought, if not more, than the deal itself. This is a reality that must be faced early on. Satisfy that and there should be no doubt or uncertainty about the deal you made and the new life you visualize for yourself.
When asked about how I felt after I sold my agency, my answer was one word: liberated. Hopefully, you may one day share the same feeling.
Related: Selling your agency: Top 10 must-dos
Barry Seigerman is an independent broker/producer. Email him at email@example.com.