Agency owners who have explored a sale in the past may wonder why discussions with potential acquirers haven’t panned out.  If you are able to get feedback from buyers that you have talked with, they may tell you that the timing isn’t right or they’re too busy to move forward.  Although those reasons may be valid, sometimes there are underlying factors that are the real roadblocks to putting together a deal.  Read more to find the unvarnished truth on why buyers are not aggressively pursuing an acquisition of your agency.

A common situation hindering a sale is a mismatch of owner personalities or firm cultures.  Sometimes one firm is conservative and process oriented while the other firm dislikes bureaucracy and is more entrepreneurial.  If owners and key employees at both firms can’t see eye to eye on how to operate the combined business going forward, the buyer may just back away.

Being overstaffed can negatively impact the profitability of an agency resulting in a reduced valuation.  There are some agency owners who view their employees like family and are unwilling to accept layoffs to achieve higher profitability.  They do not want to sell their firm only to find out that some of their employees will be terminated post-transaction.  Similar to the previous discussion about culture clash, potential acquirers may have a different vision than what the seller is willing to accept presenting another roadblock to a deal.

The age of key employees plays a significant factor in the attractiveness of an agency.  If the management team and key producers are nearing retirement age and there isn’t a bench of talent ready to take the business to the next level, some acquirers may shy away or apply a discount to their valuation of the agency.  Buyers want to have some comfort that the book of business will stick should these key employees begin transitioning out.

An acquirer may take a wait and see approach, if you recently lost a large account or had a producer with a significant book of business leave, until the agency’s revenue stabilizes.  From the buyer’s perspective, they don’t want to overpay based on an unsustainable revenue run rate.  Even if you strongly believe that there will be minimal financial impact, the buyer will most likely be cautious or put together an offer that is heavily dependent on an earn-out based on future results.

A common situation that leads to a busted deal involves an ownership group where one owner or more vetoes a sale. Maybe at the beginning of negotiations, everyone was on board to sell but as things moved forward, an owner got cold feet or didn’t feel comfortable selling to the potential buyer.  Or the majority shareholder initiated discussions with a buyer and after bringing in other owners into the loop, those partners didn’t want to sell.  For whatever reason, if the buyer senses discord among the ownership group, they will probably back away until everyone is on the same page.

One common scenario is an owner hearing that their friend sold for a high multiple of revenue and thinking the same multiple is applicable to their agency.  One has to take into account profitability as a significant factor in valuation as two agencies with the same revenue could be worth significantly different amounts.  For example, an agency with $10 million in revenue and $4 million in EBITDA (“earnings before interest, taxes, depreciation, and amortization”) will be worth significantly more than an agency with $10 million in revenue and $1 million in EBITDA, all things being equal.

Another scenario involves the business environment changing resulting in a book of business being not worth as much as before.  A prime example is benefit firms focused on small groups and individuals.  Due to the uncertainty of the business model going forward as a result of healthcare reform legislation, acquirers are not as aggressive in this area as they were 10 years ago.  Using the real estate market as an analogy, just because a house sold for $1 million during the boom times, doesn’t necessarily mean that it will sell for $1 million now.

If an agency is in a major lawsuit, this in and of itself scares away many buyers who will want to take a wait and see approach until everything is settled.  Even if the owner feels the lawsuit is unjustified, the acquiring firm doesn’t want to take on the potential liability and hassles of dealing with a lawsuit.

This issue is more typically seen in smaller agencies that don’t have the infrastructure for financial and operational reporting.  Not having organized and detailed financial and book of business records can give a bad impression to potential buyers.  It also slows down the due diligence process when an acquirer tries to verify the financial and book of business information.

The above are common stumbling blocks to putting together a deal between buyer and seller.  In some respects, selling your agency is similar to going on a job interview with a future employer.  It is advisable to put yourself in the buyer’s shoes in order to maximize the value attained when selling your agency.