With all the pressure on the independent agency system formerger-and-acquisition (M&A) activity, due to aging principals,lack of new talent entering the business andthe failure to implement succession plans on one end — andthe growing appetite for agencies on the part of large brokers andpublic companies, hedge funds and banks on the other end, whyaren't there more successful transactions?
Why do some deals disintegrate during the negotiation process orsimply blow up almost at the point of closing, after so much wastedtime, money and effort?
The number of M&A deals during the last fewyears has increased, but the supply and demand so apparent inthe marketplace is not even close to reaching its potential.
Contributing factors to deal disintegration
What are the major factors that contribute to many deals notclosing as the reality of the transaction looms? I decided to digdeeper beyond the traditional issues, like price, to find problemsthat can't be overcome. Here are just a few of the contributingfactors:
Lack of planning and preparation for the inevitable exit everybusiness owner must face. An owner suddenly decides that it is timeto sell or merge (pick one), starts talking with other ownershe/she knows about exploring the possibility of getting together.Or, another option: Engaging a consultant, committing to asubstantial engagement and success fee, and, without much homeworkon the owner's part, expecting the consultant to put it alltogether in a nice neat package.
Not understanding the basic fundamentals of how deals are madeand what options might be best, even before engaging a consultant'sprofessional advice. And the very first fundamental to know is,what is the value of the business in the mind of the owner? How didthey 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. Someowners don't know the differences between an LLC, a regular Corp ora Sub S Corp.
Having no basic benchmark information to show the business'revenue growth, profitability per employee (spread), expenses peremployee and other trends that measure the agency against industrypeers and to itself. So many agency owners mean to do this, yetnever get around to it.
Not understanding in advance — beyond price — the terms andconditions, financials, tax implications, employment contracts,payment formulas such as earn-outs and potential claw-backs, andhow these factors eventually determine the ultimate purchaseprice.
Not having a crystal-clear vision of why you want to sell, mergeor buy and not setting a specific deadline to make it happen.
Not comprehending the importance of due diligence, and whyignoring or delaying this process will inevitably come back to biteyou.
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