40 WAYS TO RUIN A DEAL:  If you resolve to abide by our bottom-40 list in the new year, we guarantee you'll screw up your next merger and acquisition deal!

Leader's Edge, December 2006
Author:  Robert J. Lieblein

FAST FOCUS

• No one has a corner on M&A mistakes; buyers and sellers both make costly gaffes.

• Pick your poison: Common areas for screw-ups are in valuations, due diligence, negotiating and alliances.

Every January I get so, so tired of the repetitious articles about setting New Year’s resolutions to fix all your personal and professional problems. I mean, after five or six of these, the only resolution I want to make is to read no more articles about resolutions.

That’s why, this year, my holiday gift to readers is to get my resolutions list out of the way in December! I think this is win-win: You get the advice before you’re exhausted from reading repeated lists, and I get to beat all the other columnists to the punch. Happy reading and merry New Year!

If it’s any consolation, I won’t be dredging up bon mots about improving your personal life; I’ll be sticking to a topic I know well—how to avoid common mistakes in the mergers and acquisitions process.

There may be 12 days of Christmas and 50 ways to leave your lover, but I’ve come up with my top 40 ways to ruin a deal. They can happen on either the buyer’s or the seller’s side and in four significant areas: valuations, due diligence, negotiating and alliances. Let’s count ’em down.

Buyers’ Faux Pas

M&A deals are not simply the buying and selling of companies. Primarily, they are transactions between people, and as humans, we all make mistakes. Learning from our mistakes is what keeps us out of the jungle.

Buyers can commit some deal-whacking errors.

1. Inability to explain pricing rationale. In a perfect world, or even in reality, the price a buyer is willing to pay for an acquisition should be supportable. A savvy buyer should be able to articulate why and how a price was calculated. If not, then negotiations devolve into a “higher versus lower” argument, a debate that nobody wins.

2. Not knowing why you’re buying. Everybody wants their business to grow, and often doing it through acquisitions sounds like a sexy way to the top. But too many buyers don’t clearly understand their own rationale for buying, and the result is the purchase of the wrong agency for the wrong reasons.

3. Deal structure inflexibility. Buyers are often advised to set guidelines for their preferred deal structures—good advice, as far as it goes. It must come with flexibility so the inevitable challenges in our non-perfect world can be met. For example, you need to resolve issues like sellers that are C-corporations or Employee Stock Option Plans, or producers with a vested ownership in their book of business.

4. Not selling the buy. Not all deals are flipped to the highest bidder. Many times sellers are looking for the best fit to ensure business continuity and security for their people. In that environment, a buyer has to be a seller—to sell the deal on its merits, such as culture, compatibility and other intangibles.

5. Going it alone. Naïve buyers often make mistakes, and they can be costly. The pound-foolish attitude of not working with seasoned advisors can result in expensive errors.

6. Settling for less. One of the best decisions buyers can make is to simply walk away from a deal that isn’t right for them. But often the tendency is to go through with it anyway because of all the time and emotional energy put into the process.

7. Devilish integration details. Are you one who thinks the small stuff will take care of itself? My experience tells me that’s a dangerous attitude in M&A. Certainly the financial transaction is vital, but paying no attention to proper integration can result in disaster. The best deals consider and plan for such issues as integrating two firms’ culture, people, leadership and process. The worst deals do just the opposite.

Errors on the Selling Side

Buyers don’t have a corner on mistakes. Sellers have a their own list of common errors.

8. Not understanding value. History has taught us that more than half of all sellers have an unrealistic expectation of what their business is worth, both under- and over-valuing. Realistic, supportable valuation allows an agency owner to make the best deal.

9. Myopia. Many times, sellers only see one path forward, when in fact there may be many options to consider: Sale to a third party, creating an ESOP, sale to a private equity group or planning for internal perpetuation all might be explored.

10.  Jumping ahead. Too often, sellers will be thinking about their lake cabins and fishing poles before contemplating getting their business ready for sale. Put the horse before the cart and consider the timing of selling your business. You must be prepared, either with perpetuation options or an attractive, marketable package. To maximize the value of the agency, consider a longer timeframe to prepare for a sale, and plan ahead.

11. Rosy lenses, cloudy vision. Since most sellers aren’t capable of seeing their firm through the eyes of a third party, at least they must be willing to take off the rose-colored glasses to read the recommendations of an experienced advisor. Only then will they truly understand hidden weaknesses or untapped value.

12. Overconfidence. Being gung-ho, go-get-’em capitalists, many agency owners assume they can sell their own agency. After all, they know it best, and selling is what they do. But don’t let such a Pollyanna attitude part you from your money too easily. Unless you’ve been involved in many M&A deals, it’s very likely that the person across the table will have much more negotiating savvy.

13. Insufficient support. Proper documentation can be the difference between a deal and a successful deal. A seller should employ advisors who will guide them into a more accurate view than is sometimes presented by historical financial documents, which may unintentionally skew the company’s value.

14. Distraction. Often an agency owner will not understand the process of selling the agency, which can have a destructive effect. A deal that requires much time and energy over the course of a year to consummate (not uncommon) can distract the owner from running the business.

15. Time kills. Although deals often take many months, sellers may feel that time works in their favor, but that’s only true to a point. Time kills all deals. You should never rush through a transaction, but also you should be careful not to lose momentum.

16. Over-representation. Often, sellers feel they should bring an attorney into the process early, but that too can be damaging. I’ve seen many attorneys kill deals before they even had a chance at working, so it is best not to introduce an attorney until the buyer and seller agree on the basics of the transaction.

Valuation Gaffes

Even if both buyers and sellers are careful, bad numbers could derail the deal.

17. Thumbs down. Too many valuations are reliant on informal “rules of thumb,” such as multiples of EBITDA (earnings before interest, tax and amortization). I say prove the model.

18. Calculation conundrums. Understanding the true earnings power of an agency is critical, and a valuation must take into account whether the pro forma adjustments are real or whether they just mask an ongoing problem.

19. Taxing issues. A less than complete understanding of a deal’s tax ramifications can cause a problem that can’t be fixed to either side’s satisfaction.

20. Missing the intangibles. Insurance people know that the full value of an agency goes well beyond the numbers. It can be greatly enhanced by intangibles. But how you calculate things like name recognition, niche specialties and carrier relationships can make a big difference in negotiations.

21. Forgetting to check the balance. The balance sheet must be taken into account, including such items as working capital and tangible stockholders’ equity when making adjustments to the economic valuation.

22. No segue to synergy. A common error is to place too much value on expected synergies, only to have them never emerge as promised.

Giving Diligence Its Due

Think you’re spending enough time preparing for a transaction? Often overlooked, comprehensive due diligence is the linchpin for a successful deal.

23. Didn’t do due diligence. If you don’t spend enough time or energy to perform due diligence on a seller’s key employees, you may get less than you bargained for. This step is often the biggest mistake by buyers.

24. No eyes on the prize. A thorough review will include a plan for incentives or other measures needed to make sure key employees will stay with the firm post-transaction.

25. Culture clash. Even if the prospective agency looks great on paper, the cultures between that firm and yours may not mesh. Best time to find that out is before you sign on the dotted line. Particularly study staff integration and customer care.

26. Don’t know your own strength (or weakness). There is no better time to perform an analysis of strengths, weaknesses, opportunities and threats, and a basic SWOT report should be part of every buyer’s due diligence package.

27. Rookie mistakes. Too many agencies rely on inexperienced employees to perform the deal’s due diligence, and that’s just plain dangerous. Red flags could pop right up off the page and still be missed. You need an experienced investigator.

28. History channeling. Unfortunately, many due diligence efforts focus on historical results rather than future financial expectations. In reality, a successful transaction will be measured by forward-looking results, so that’s where your eyes should focus.

29. Non-integration. The deal doesn’t end with writing the check. In fact, its success hinges on whether the acquired firm can truly be integrated. Your due diligence should soberly address this question.

Focus on Negotiations

The art of the deal consists of experience, technique and finesse. Problems arise when those are missing.

30. Learning on the job. If your negotiator is inexperienced, you will definitely pay for his or her on-the-job education…the hard way. This is the most common weakness observed in the M&A process.

31. Failure on the fulcrum. Understanding what levers are in your toolbox and when to wield them are critical points that will significantly affect how you negotiate.

32. Blabbergasting. Negotiations require high quality communication. Spend twice as much time listening as talking.

33. Unfamiliar turf. Often, inexperienced negotiators are unprepared for their jobs. Preparation consists not only of knowing your position, but knowing the other party’s position and how they will react to yours.

34. Lack of creativity. Proper preparation also enables you to consider the possible alternatives. Thinking “inside the box” often leaves quality alternatives out of the equation, and negotiations hit a dead end.

35. Afraid to play hardball. There is a time in negotiations when hardball tactics will work. Whether it’s an ultimatum, walking away, invoking competition or using some other strong-arm tactic, an experienced negotiator will know when best to play the ultimate hand.

Sidling Up to Alliances

The last five of my top 40 are common mistakes in forming alliances. These can be just as productive—or destructive—as an outright sale.

36. Ships in the night. Do you know with certainty that your alliance partner has the same goals and objectives as you do? Incompatibility has sunk a lot of deals.

37. Out of alignment. Again, if your partner’s priority issues are not fully understood, your two firms could be working toward two different goals. It takes two parallel rails to get the train out of the station.

38. Brown out. Too often, either or both partners put less energy into the alliance than is necessary, resulting in diminished results or failed initiatives.

39. Hating math. Properly defined financial measures will enable each side to evaluate the effectiveness of the partnership. It’s up to you to live by those metrics.

40. No escape plan. When your firm is in times of trouble, it is not the time to set rules for exiting the partnership. Outline these provisions up front so each firm knows when the axe will fall.

There now, that wasn’t so bad, was it? Get those pesky resolution lists out of the way early and you can concentrate more on celebrating! My apologies to all the columnists whose thunder has been stolen. May I suggest they resolve to next year plan a bit farther ahead? Happy holidays.

Lieblein is a contributing writer and managing principal of WFG Capital Advisors. rlieblein@wfgca.com