By Rick Dennen, President and CEO, Oak StreetFunding

If you apply the notion of a chain being only as strong as itsweakest link to an insurance agency, companies embarking on mergersor acquisitions would be wise to invest time and money to uncoverweak links before a sale is finalized. Although many agency ownersstart an M&A process focused on financials, overlooking orminimizing hidden vulnerabilities can be a costly mistake.

The need for buyers to carefully evaluate financials, preferablywith the help of an accounting professional, is a given. A thoroughreview and analysis of budgets, commission statements, retentionreports, audited financials and tax returns give buyers a goodpicture of an agency's financial viability. Buyers also mustdetermine how much capital will be needed to continue agencyoperations during and after the acquisition.

Read related: “LushLandscape, Changed Environment.”

Trouble often arises after an acquisition is complete becausebuyers didn't consider “intangibles.” To avoid second-guessing anacquisition, buyers should ask two simple questions: Do we have theright people? Can we retain and grow the existing level ofbusiness?

Do we have the right people?

People make all the difference in the success of an acquisition.In addition to financials, buyers need to determine if they arepurchasing an agency run by people with good business philosophiesand practices or one with a poor reputation. Although sellers mayhave professional personas and nice explanations for wanting tosell, there could be more beneath the surface. To know the fulltruth, buyers need to invest time in getting to know the keyplayers and how they are perceived by stakeholders.

Due diligence with human capital must be thorough. Buyers alsoneed to determine which leaders, producers or key employees shouldremain with the business and are likely to stay planted. To dothis, buyers should assess each person's employment track record,character and professional strengths. They should talk withemployees about their desired role after the acquisition and howthey envision the business functioning and progressing.

While no one denies the importance of speaking to as many seniorstaff members as possible, it's also important to learn from middlemanagement and office personnel. Spending time with these groupswill help determine if senior management's depiction of the companyaligns with employee perspectives, and help buyers understand howthe agency might look. By asking questions and observing staff atwork within their areas of responsibility, buyers can understandeach employee's strengths and weaknesses and decide if and how eachcan contribute after the acquisition.

Can we retain and grow the existing level ofbusiness?

Retention comes down to three key factors: contracts, customersand service. In addition to carefully reviewing all significantcontracts, buyers should contact carriers to ensure contracts andrates will remain intact and to determine if they can be mergedwith existing contracts for the same or better rates. Attorneys canprovide critical expertise in evaluating and determiningenforceability of all employee-related contracts, non-compete andnon-solicitation agreements, leases, vendor relationships and anyother contracts.

To guard against customer flight following an acquisition orattrition later on, it's best to become acquainted with thecustomer base. Identify key customers based on revenue, productpurchases, producer, and length of time with the agency. Meet withas many as possible to gauge what their experience has been as acustomer, the strength of the relationship and what theirlikelihood of loyalty is. One of the easiest ways to approach thisstep is by accompanying agents on calls. It's also wise to conductonline research of the agency, competition, and region to increasethe chances of finding existing or potential hidden issues.

Read related: “AscendingThrough Acquisition.”

Keeping happy customers requires a strong transition plan.Because the right people are integral to a successful transition,getting agreement from the selling agency on who will be part ofthe plan and how long they will help should be accomplished beforethe acquisition. Not doing so typically results in making poorfirst impressions with customers and the need to salvagerelationships.

To continue high levels of customer service that, hopefully,have been the legacy of the selling agency, buyers should have agrasp of how the agency functions, including how it interacts withcarriers. By visiting the agency's offices, buyers can get a feelfor procedures, workflows, software, accounting systems andcustomer service. They can see how relationships with carriersaffect daily operations. This is the only way buyers can discoverinefficiencies or other issues that will have to be addressed.

While this isn't an exhaustive list of what to consider beforean acquisition, keeping a focus on these two key questions willsignificantly increase your chances of success.