I always tell my students that you learn more from your failures than from your successes, so when I was asked to write this blog about “Why Mergers Fail”, I felt uniquely qualified to write this because no matter how many successes you have, people have a tendency to focus on the failures and I sure have had mine.
I think mergers fail for many reasons, too many reasons, to focus on in a blog. In fact, it was the subject of my Master’s thesis. I found out a few things in the process in writing that paper, like 70 percent of all mergers fail. After reading this, I would invite you to give me your thoughts. If I could point to what I believe is the most preventable reason for a failed merger, it would be the setting of unrealistic expectations both by Agency Owners and their hired financial advisors.
Where the problem begins:
Not Understanding your Goals and Objectives
When an insurance broker hires an advisor to help them sell their business, the focus is on the financial information. While the financial information is important, it begins a walk down the wrong path. The advisors spend most of their time trying to squeeze every last penny out of the pro forma profit or setting unrealistic revenue goals so that they can get the highest price for the agency. They spend little if any time trying to understand the goals and the objective of the agency owner.
Stepping back
Once the agency owner sees that if they increase the profit of the agency, they receive more in the purchase price – suddenly the walk down the wrong path becomes a jog. Agency owners begin to take the position that they can achieve these unrealistic expectations, with less staff and less resources. With certain deal structures in place, they are reluctant to do what is necessary to help grow the business, like hire and train producers.
Unrealistic Expectations
Financial Advisors understand that price is a very important factor in getting an agency owner or owners to sign an engagement letter. By stretching industry multiples, and creating an inflated pro forma profit, expectations are usually inflated and a false sense of value for their client can be created. The unrealistic expectations of the agency owner now become what they consider normal, which can lead to disappointment, as those expectations are almost never achieved – continuing the journey down the wrong path.
When the agency is sold, the buyer will require that the above expectations be achieved. When these expectations are not achieved, the buyers are forced to take actions that protect their investments and the business suffers, the employees suffer and it becomes difficult to achieve any of the financial goals that are required to protect the buyer’s investment.
So how do you as an agency owner protect yourself from taking a fully fledged run down the wrong path?
Understand Personal and Financial Goals
First, find an advisor that is focused on what your goals are for your agency and with potential for partnership. You should both focus on your personal and professional goals first. They should have the experience to help you understand what you can expect going forward and understand the buyers so that they can understand where you have the best chance to achieve your goals. The process of selling your agency will be 80 percent emotional and 20 percent financial.
Look for A Partnership
Once your goals and objectives are understood you can focus on finding a potential partner that can make your business better. Not just a little better but can really help you grow your business beyond what you can do on your own. The focus should be on what you can do together that neither of you can do on your own.
Assess your Agency and Look for a Match
Next you need to understand your business financially. That sounds silly but many agency owners don’t realize what type of business they have because they are so focused on making sure their clients needs are met, they lose sight of their own business. You need someone that will be honest with you about your financial position and what that means to a potential buyer. You need someone that understands the buyers and what each of them has to offer and how that matches your financial, personal, and professional goals. Most importantly you need to make sure that the financial projections are realistic because once you sell your company you will be required to meet those projections.
It is all about making sure that everyone understands what to expect.
