fun & Profit
BY BARRY SEIGERMAN
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.
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
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 fac-
tors 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 understand-
ing 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
Why Agency M&A Deals Fail
THERE ARE MANY FACTORS THAT GO INTO MERGERS AND ACQUISITIONS,
BEYOND THE BASIC ISSUE OF PRICE. HERE ARE SOME OF THEM.
Failure to possess clear
insight and a thorough
understanding of several
key factors will generally
lead to the collapse of
an otherwise solid deal.
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