An agency recently purchased another for far more than it wasworth. My attempt to talk the buyer out of paying so much failed.The “logic” expressed was: “By combining operations, I caneliminate two CSRs, 100% of the seller's rent and other overheadexpenses. So I can pay more for the agency and still make a lot ofmoney!” Should this ever be your thought process, STOP!

If an agency is going to cut two CSRs, then some seriousmismanagement has occurred somewhere. If all the CSRs in thebuyer's and the seller's agencies are at or near capacity inworkload (indicative of good management), how can two be droppedafter the merger? If the excess is with the buyer's agency, why paythe seller extra for the buyer's poor management? Unfortunately,this happens quite often anyway.
For example, if an agency averages $70,000 in commissions perpersonal-lines CSR and has four of them, the agency has one toomany personal-lines CSRs (unless there are special circumstances).So if that agency buys another agency with three personal-linesCSRs whose books average $125,000 in commissions and “finds”synergy in the opportunity to cut one personal-lines CSR, the buyeris fooling himself. The reality is he's discovered his own poormanagement. Maybe the acquisition makes the problem easier to see,or maybe the buyer knew it was there all along–but there is nosynergy.
Declaring such “synergies” amounts to a major spin job. Thespinmeister announces his or her agency is going to dramaticallyincrease profitability after the merger by cutting costs–usuallyjobs. But if the company had been run efficiently to begin with,there'd be much less to cut.
The idea that these buyers are finding great synergies is purefiction. If that were true, bigger companies growing throughacquisitions should be more productive, right? Consider thefollowing evidence to the contrary:]
o According to the 2006 Independent Insurance Agents & Brokersof America's Best Practices Study, for agencies with revenuesbetween $10 million and $25 million, the average revenue is $15.2million. The average revenue per person for agencies in that samerevenue range is $160,000.
oThe average revenue of the eight publicly traded brokers is $3.46billion and average revenue per person is $183,000.
These results show that the big brokers, whose growth resultsmostly from acquisitions, obtain an additional $26,000 of revenueper person from that extra $3.44 billion in revenue, or an extra0.00076% in economies of scale. This is immaterial, except on agigantic scale. Even looking at the publicly traded brokersindividually, we've found no evidence such synergies exist. Sizehas no correlation with growth or profitability for the publiclytraded brokers.
Rather than really produce synergies, many acquisitions simplyprovide cover for layoffs and poor management. Instead of makinghard decisions and admitting the firm is overstaffed, a buyer canbuy another firm and announce the layoffs as if he or she were agenius.
I once reviewed several similar agencies that were in the samegeneral location. The major difference among them was how thevarious management teams worked. The less efficient a managementteam was in running its business, the more it was willing to payfor another agency. In other words, it was willing to pay more tosoak up the excess capacity caused by its poor management. Buyersalready running good shops can't afford to pay as much for anagency because they can't shave off as much expense.
The buyers willing to pay the most felt pretty smart because theywere able to cut so much cost. If they'd done a better job withtheir own businesses, they wouldn't have been willing to pay apremium for another agency–and maybe wouldn't have sought theacquisition in the first place. As a business writer once wrote,“Mergers and acquisitions are what you do when you run out of otherideas.”
The cost of such acquisitions extends beyond misplaced investment.Wasted sales opportunities are even more significant. In the middleof capturing these “synergies,” layoffs cause customers to bereassigned, and staff morale is damaged. Both lead to poorretention. Time spent reorganizing is not spent selling! How manysales are missed while the focus is on achieving falsesynergies?
Another synergy myth is that by purchasing more agencies, a buyerwill increase its volume with carriers and, therefore, its profitsharing. But a study of 12 national and regional carriers'profit-sharing contracts showed that bonuses increased an averageof just 0.0052 percentage points when premiums rose to $5 millionfrom $1 million–not much of a synergistic gain.
This does not mean all acquisitions are unprofitable. Largeagencies can sometimes achieve synergies by acquiring smallagencies. Buyers may find a producer or other key people in theacquired agency who are just hitting their prime. Other unusualsituations exist that can lead to large profits.
If agency owners hope to be more successful with mergers andacquisitions, they must be honest with themselves. Before making anacquisition, analyze your own agency. How well is it run? How willyou improve the seller's management? Will the sellers stay orleave? If they stay, how will they suddenly become good managers?What's the advantage of acquiring a seller if the extra volume withcarriers doesn't produce higher profit sharing? If an advantageexists, what's its real value?
Many buyers have overpaid for agencies in hope of correcting theirown mismanagement. Successful mergers and acquisitions start withhonesty and a willingness to look at how well and efficiently anorganization is run. Before you consider growing your business bybringing the outside in, first grow it from the inside out. Getyour agency in order in terms of its efficiency and management.Then folding in another agency will be easier, and the odds ofsuccess will be greater.
Chris Burand is president of Burand & Associates LLC, anagency consulting firm. Readers may contact Chris at (709) 485-3868or by e-mail at [email protected].