By Tim Cunningham and Dan Menzer, OPTISPartners

In 2012, there were approximately 300 reported sales ofindependent insurance agencies and brokerages. We know fromexperience that many of these transactions and nearly all largersellers—as in all other industries—turn to the guidance of anindependent advisor when they're thinking of conducting a merger oracquisition. Is it really more prudent to engage an advisorthan to simply go it alone?

M&A advisors can bring an extensive array of services to thetable, but in the end, they generally fall into the followingprimary categories:

• Advocate for the seller in all aspects of the process
• Experience from other transactions with buyers and othersellers
• A dose of reality for the seller.

Most sellers only get one opportunity to sell the business theyhave spent years building: providing expert advice and services fortheir clients, advocating on their behalf in pricing negotiationsand claim situations. When they finally decide to find the rightbuyer for their firm, it's time for the selling agent to become theclient and call on an expert advisor for advice on how to sell thebusiness, something they've probably never done before.

Read related: IQ: M&AActivity Hits All-Time High in 2012.

More so than in years past, the potential buyer group is vastand diverse:

• Publicly traded brokers, most very experienced in acquisitionsand offering fair value and a predictable future for your firm,your staff and your clients
• Private equity backed buyers with money to invest, some withnearly as much M&A experience as the public brokers to thosejust getting into the insurance brokerage business
• Other privately owned firms in which a true merger oracquisition could accomplished, if the valuations, ownership orcapital structure mesh well with the cultural fit of thefirms.

Each firm, from whatever ownership category, will have adifferent personality, their own approach and biases to theacquisition process, and will be advocating on behalf of their ownfirm, not the seller's. This is a a subtle but significant point.

Along with acting as the seller's primary advocate, theadvisor's functional responsibilities throughout theseller-representation engagement include:

1. Developing a thorough understanding of the seller's business byreviewing and analyzing various types of financial and operationalinformation as well as face-to- face meetings with principals andkey employees, as necessary, to learn as much as possible about thecompany and the people
2. Preparing the “seller profile” report, including the pro formaincome statement for delivery to the buyer universe based on thein-depth knowledge of the seller from Step No. 1. This standardizesthe information requested by most potential buyers in a commonformat
3. Building a list of potential buyers with the client and makingthe initial marketing contacts and screening with the buyer group.All buyer discussions are subject to execution of confidentialityagreements to protect the interests of the seller's firm.
4. Responding to questions from the buyers' review of the profile,isolating serious candidates and coordinating meetings betweenprospective buyers and the client to expose the seller to multiplebuyer organizations' management, staff and firm culture
5. Soliciting formal offers from interested buyers and summarizingkey points of difference for the client. Because price is notalways the sole driver of the selection for the seller, assistingwith the objective (price and terms) and subjective (culture, fit,people, etc.) qualities of the potential buyers is always acritical aspect of this process.
6. Once the preferred buyer is identified, negotiating the mostattractive deal terms possible, keeping other buyers in wait incase something comes up to quash the deal.
7. After agreeing to final terms, assisting the seller's otheradvisors regarding purchase and sale documents, buyer's duediligence and general project management of the formal closingprocess. The advisor will also create separation and a bufferbetween seller/subsequent employee and buyer/subsequent employer ondifficult or contentious matters through the negotiationprocess. It is good to have both a lightning rod and shieldthroughout the process.

Read related: “Deloitte:Insurance Industry Primed for M&AActivity.”

Throughout this process, the advisor is continually establishingreasonable expectations on the part of the seller, whether it'spurchase terms, contractual issues, timing or other matters. Thereis a plethora of slightly to materially inaccurate anecdotalinformation floating around the agent-broker M&A universe. Theadvisor can sort through fact and fiction for their clients,providing guidance on industry customs and practices based onextensive experience and knowledge of the M&Amarket.

The critical starting point and key driver of value is the proforma income statement. Experienced advisors collaborate with theirclients to establish the pro forma based on the in-depth knowledgeof the seller. The advisor will also identify uniquecharacteristics in seller's operations that can be incorporatedcreatively into the negotiation of price/terms, all for the benefitof the seller. Generally, buyers will not have the same level ofknowledge of the seller, and will not be able nor are necessarilymotivated to drill down as deep as the advisor to find incrementalvalue for the seller.

Buyers by nature will also be more aggressive in their pricingand terms when there is an advisor involved because they knowsomeone else is advocating for the seller, and because there may beother potential buyers in the mix. Although most buyers willapproach the acquisition opportunity in an attempt to be fair withthe seller, they are still first and foremost working for the bestinterests of their own firm. Using an advisor will helpensure the price and terms of the transaction are the bestavailable for the seller.

Selling the business can be extremely disruptive to the ongoingoperations of selling insurance and taking care of clients. It is avery time consuming and arduous task for the inexperienced sellerto effectively negotiate his way through the transaction steps ontop of maintaining the business focus. Many buyers prefertransactions where the seller has engaged an independent advisorbecause they are more familiar with the various stages of thetransaction process.

When it comes to selling your business, likely the largest assetin your portfolio, an advisor's impact on the value of thetransaction for their client can be material, in price, terms andcontract language. Moreover, agency principals can minimize thedistractions from running the day-to-day operations of theirbusiness, which usually is a full-time job for most ofthem.

As a smart person once said, given enough time, he couldprobably make his own car, if he was so inclined. But since time issuch a limited resource, why would any of us choose to invest it soheavily in something we aren't intimately familiar with? There areplenty of people who know how to build a house or make a car—orhelp you sell an insurance agency. These firms or individuals canbring tremendous value and ease of mind to their clients, generallyfar in excess of what they are paid for their services. Why wouldanyone not want to take advantage of their expertise and wisdomwhen dealing with such personal financial matters?

Tim Cunningham and Dan Menzer are Principals with OPTISPartners (www.optisins.com), aChicago based investment banking and financial consulting firmproviding M&A, valuation and strategic consulting services tofirms in the insurance distribution sector. The authors canbe reached at 312-235-0081 and 630-520-0490, respectively, or by email at [email protected],and [email protected].