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Why are certain transactions or “deals” 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.

Each transaction should be judged on its own merits. However, there is often a pattern that develops during the merger and acquisition (M&A) process. Here are a few examples based on my experience with many insurance agency buyers and sellers over the past 30 years.

Five deciding factors and how to avoid them

  1. Compatibility. The lack of good compatibility between the parties occurs when the due diligence has not been carried out correctly. For example, merging a sales and service organization may initially seem good, but may ultimately lead to disaster. Buyers and sellers should understand and appreciate each other’s background and business philosophy before entering into a transaction.
    How to avoid: Use a third party to properly assess each company. An unbiased opinion will avoid issues overlooked by rose-colored glasses. The key is for the seller to consider how the buyer will run the business. The buyer should also understand and appreciate how the business has been run to date and take appropriate steps for a smooth transition.
  2. The owners are not ready to sell. Owners may think they are ready to sell and are not. When it comes to the wire, they can’t pull the trigger. Some sellers are afraid to go home to make the “to do” list. They have no real hobbies and view selling/retiring as “dying”. We’ve actually had clients who contracted illnesses before signing the final agreement.
    How to avoid: The seller needs to sit down and review everything, including selling the business, life after the sale, and financial equity. Again, outside experts can help with this process. Unfortunately, some sellers will get cold feet no matter what, so the buyer should be patient. Selling a business can be like dealing with death for some people. After all, the business has often been the biggest part of a typical salesperson’s life. The key to this deal breaker is getting career advice and having patience for the process to unfold.
  3. Price. Owners often have an exaggerated opinion of the price of their business. They “heard” today that companies pay two and a half to three times the commission, but their profit margin is only around 15% to 20%. Rumors on the street are usually a case of terms that require strong revenue and earnings growth in the future to get the highest dollar or multiple, or the business is highly profitable, i.e. say an EBITDA in the 25% to 35% range.
    How to avoid: Buyers need to know what a fair price is for an agency and stick to it. Buyers need to understand what price makes financial sense to them. Sellers need to educate themselves on agency value, especially their own, and the full impact of agreement terms.
  4. Giving up control. Many owners and sellers love sales and often get tired of the job of managing the agency. Despite this, they are generally afraid to cede control of the business. They don’t know what life will be like when they don’t make the decision. Most salespeople have been running their own business for many years and may lack the skills or temperament to work with a partner or for a new owner.
    How to avoid: Salespeople need to assess what they’re getting into and think about what it would be like to work for someone else. Buyers should provide a way to make the transition seamless, such as giving the seller as much authority as possible, and having a clear understanding of what the seller’s “hot” buttons are.
  5. No transition plan. The lack of a transition plan will make a closed deal go awry. A buyer can tell the seller that nothing will change and that the seller anticipates it. However, the buyer and seller may not have understood each other’s business model and may be fooling each other.
    How to avoid: The seller must understand that things are going to change and the buyer must state this fact realistically. During the ‘courtship’ process, both buyer and seller should consider how the integration will unfold and try to preserve the best aspects of each company’s cultures.

Five negotiators

  1. Establish rapport. A true automatic connection should develop between buyer and seller. Synergy is when 1+1=3 or 4! These are the special offers when the potential seems limitless. The key is to make sure the connection is real and not two salespeople trying to blow each other off.
  2. Ideal post-transaction roles. This happens when the seller and the buyer will be able to do what they like to do best. The role may include things like the ability to write accounts they couldn’t get before due to the presence of additional markets and the ability to provide new services to their clients. Or maybe a salesperson only wants to serve key accounts and not worry about management.
  3. Weaknesses resolved. Weaknesses in the agency that the seller or buyer cannot resolve themselves are resolved with the transaction. The ideal transaction includes complementary strengths and weaknesses, rather than just several of the same strengths or weaknesses.
  4. Effective business succession. The agreement should provide the much-needed perpetuation plan for owners that they were unable to make with their own key people and/or family members.
  5. Smooth transition. When both parties are upfront about future business integration, owners will feel that the change will be acceptable and not too drastic. The seller can get the buyer an “office” where he can stay as long as he wants. It’s the opposite situation of Deal Breaker number five, when both parties have been unaware that change will happen, and both parties underestimate how much and its impact. The ideal scenario is when the transition is planned and both buyer and seller remain flexible.

The difference between a successful transaction and one that fails is a clear understanding of the relevant facts. Using a third party will eliminate biases and personal feelings that too often cloud judgment. Closing a good deal for all parties takes time, patience and expertise.

Mergers and Acquisitions

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