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5 Things That Kill a Deal

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At Live Oak Bank, we have the opportunity to observe the development of many acquisitions and mergers. There are things that make a great deal: a “meeting of the minds” between buyer and seller, complementary strengths among the staffs, compatible office cultures, a growing stream of new clients who will benefit from the increased reach and expertise unleashed by combining the firms.

As we all know, however, there are at least “50 ways to leave your lover,” and at least as many ways to spike what, at first, looked like a deal made in heaven. Here are the problems we see most often. Future posts will cover how to fix them—or avoid them altogether.

  1. Valuation/Purchase price: Sellers tend to think their business is valued higher than the market will bear (go figure). The problem we see often is the misconception that any financial advisor’s business can be valued at approximately 2x revenue. The business should really be valued based on a multiple of cash flow and a discounted cash-flow analysis.

  2. Seller Transition: Sometimes it is tough for a seller to let go, and he or she would like to stay on as an employee for a longer period of time than the buyer anticipates. Other times, the buyer would like the seller to stay on to help with the transition, and he or she is looking to retire completely before a transition can be completed.

  3. Culture vs. courtship: Buyers and sellers typically undergo a courtship period, and many times, after multiple meetings, one party realizes that they are not a good fit. This may be because the two parties run their businesses differently, or because they have created much different cultures within their organizations. Do not underestimate the importance of culture. That is what will make it possible for two staffs to mesh—or not.

  4. Sustainability of profits: After taking a deeper dive into the business, a potential buyer may find that profits are not as sustainable as the financials first indicate. Threats to sustainable profits include: high average age of the clients, recent growth derived from market gains rather than net new assets, client concentration, or a large portion of nonrecurring revenue.

  5. Post-transaction changes to the business: Sellers like to protect their clients and their employees. If they get the sense that a buyer is going to make major changes that will affect their business, employees or clients, they may hesitate to complete the transaction.

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