If you apply the notion of a chain being only as strong as its weakest link to an insurance agency, companies embarking on mergers or acquisitions would be wise to invest time and money to uncover any potential problem points, even seemingly small ones, before a sale is finalized. Although many agency owners start—and finish—an M&A process focused almost entirely on the financials, overlooking or minimizing hidden vulnerabilities can be a costly mistake.

Trouble often arises after an acquisition is complete because buyers didn't consider “intangibles.” To avoid second-guessing an acquisition, buyers should ask two simple questions: Do we have the right people? And can we retain and grow the existing level of business?

Do we have the right people?

In addition to financials, buyers need to determine if they are purchasing an agency run by people with good business philosophies and practices or one with a poor reputation. Although sellers may have professional personas and nice explanations for wanting to sell, there could be more beneath the surface. To know the full truth, buyers need to invest time in getting to know the key players and how they are perceived by stakeholders.

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

While no one denies the importance of speaking to as many senior staff members as possible, it's also important to learn from middle management and office personnel. Spending time with these groups will help determine if senior management's depiction of the company aligns with employee perspectives. By asking questions and observing staff at work within their areas of responsibility, buyers can understand each employee's strengths and weaknesses and decide if and how each can contribute after the acquisition.

Can we retain and grow the existing level of business?

Retention comes down to three key factors: contracts, customers and service. In addition to carefully reviewing all significant contracts, buyers should contact carriersto ensure contracts and rates will remain intact and to determine if they can be merged with existing contracts for the same or better rates. Attorneys can provide critical expertise in evaluating and determining enforceability of all employee-related contracts, non-compete and non-solicitation agreements, leases, vendor relationships, and any other contracts.

To guard against customer flight following an acquisition, or attrition later on, it's best to become acquainted with the customer base. Identify key customers based on revenue, product purchases, producer and length of time with the agency. Meet with as many as possible to gauge what their experience has been as a customer, the strength of the relationship and what their likelihood of loyalty is. One of the easiest ways to approach this step is by accompanying agents on calls. It's also wise to conduct online research of the agency, competition and region to increase the chances of finding existing or potential hidden issues.

To continue high levels of customer service that, hopefully, have been the legacy of the selling agency, buyers should have a grasp of how the agency functions, including how it interacts with carriers. By visiting the agency's offices, buyers can get a feel for procedures, workflows, software, accounting systems and customer service. They can see how relationships with carriers affect daily operations.

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

Special Reports /

Thinking of an Agency M&A? Answer These Two Questions First

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