MERGERS AND ACQUISITIONS
As merger mania rolls on , more investors and firms are looking for businesses to snap up . But many company marriages fail . Is now the time to sell ? And how do you pick the right partner and make sure the deal doesn ’ t blow up ?
It could have been a tough transition in 2014 when HUB International acquired independent insurance agency John O . Bronson Co .
The two firms couldn ’ t have been more different in history or size . HUB started in 1998 when 11 Canadian brokerages merged , becoming the world ’ s ninth-largest insurance broker by 2014 . John O . Bronson Co . had served the Sacramento region since 1888 .
But the Bronson team did their homework , meeting with five potential buyers to find the right fit , says Robert McVicar , a former vice president at Bronson and now executive vice president at HUB International Sacramento . The Bronson team wasn ’ t interested in a company that would offer a good price but not be committed to its employees . HUB stood out because the culture of the two firms meshed — both are “ entrepreneurial , focused on our people ,” says McVicar . Also important : HUB wasn ’ t looking to change how Bronson operated , which wasn ’ t true of some other firms they talked to .
Bronson ’ s sales staff saw the advantages : access to more claims and loss-control resources and to specialized experts . Producers could take that message to clients , which helped keep customers through the transition . No Bronson employees left the company over the ownership change , McVicar says . “ Finding a partner that aligned with our goals and objectives and morals was really important ,” he says .
Globally , the value of mergers and acquisitions hit an all-time record in 2021 . But more deals doesn ’ t necessarily mean more profitability , satisfied employees or contented customers . According to the Harvard Business Review , 60 percent of mergers and acquisitions destroy shareholder value . That outcome isn ’ t inevitable though : Area business leaders and M & A experts have lots of wisdom on how to avoid a deal that falls through or causes problems for sellers and buyers months or years later .
When transactions go bad
For healthy companies looking for M & A partners , it ’ s a seller ’ s market . Buyers involved in health care transactions
“ It ’ s never too early to start planning for a sale . You just don ’ t know when someone ’ s going to come knocking .”
CURT ROCCA Managing partner , DCA Partners
paid 20 times earnings in 2021 , five times higher than 2019 , according to management consulting firm Bain & Company . Elizabeth Leet Jackson , partner at Sacramento law firm Delfino Madden , says the rise in interest rates hasn ’ t slowed the surge : In 2021 her firm did $ 1 billion in transactions . In first quarter 2022 , it hit $ 250 million , though it ’ s the fourth quarter that ’ s usually its busiest .
Area experts mostly give similar reasons . Historically low interest rates mean more buyers are looking for returns , especially private equity funds getting into new cash-flow-positive industries like insurance and health care . Target companies look more attractive because they benefited from federal pandemic relief and paid down debt , so their balance sheets are strong . And for sellers borrowing to make a purchase , debt is still cheap by historical standards .
That doesn ’ t mean inflated prices are the rule everywhere . Software companies get valuations that are many multiples of revenue even when they don ’ t show a profit , says Jessica Holcombe , founder of the Holcombe Law Group in Auburn . More traditional businesses — home inspection companies , restaurants , service businesses — normally aren ’ t seeing those price spirals in a sale , she says .
Deal frenzy also means more sellers who aren ’ t prepared . If a seller has trouble assembling core documents and prolongs the sale process , market conditions can change and the buyer might pull out , says Dan Morash , founder and CEO at California Safe Soil in McClellan Business Park and a former Wall Street investment banker who ’ s bought and sold numerous projects in the energy sector .
Sellers also can move too fast . After identifying a buyer and seeing a purchase price they like , an owner might sign a term sheet , which describes the major parts of the deal , without consulting their attorney . Only later do they find out from counsel about unfavorable terms , like a noncompete provision that keeps the owner from working in their own industry for a long period after the sale , says Holcombe .
Owners also overpromise and underdeliver , which can come back to bite them post sale . In most transactions , a portion of the sales price is withheld and payments toward the agreed price are doled out over time post closing as the company meets agreed milestones ,
50 comstocksmag . com | June 2022