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

If an agency is going to cut two CSRs, then some serious mismanagement has occurred somewhere. If all the CSRs in the buyer's and the seller's agencies are at or near capacity in workload (indicative of good management), how can two be dropped after the merger? If the excess is with the buyer's agency, why pay the seller extra for the buyer's poor management? Unfortunately, this happens quite often anyway.
For example, if an agency averages $70,000 in commissions per personal-lines CSR and has four of them, the agency has one too many personal-lines CSRs (unless there are special circumstances). So if that agency buys another agency with three personal-lines CSRs whose books average $125,000 in commissions and “finds” synergy in the opportunity to cut one personal-lines CSR, the buyer is fooling himself. The reality is he's discovered his own poor management. Maybe the acquisition makes the problem easier to see, or maybe the buyer knew it was there all along–but there is no synergy.
Declaring such “synergies” amounts to a major spin job. The spinmeister announces his or her agency is going to dramatically increase profitability after the merger by cutting costs–usually jobs. 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 pure fiction. If that were true, bigger companies growing through acquisitions should be more productive, right? Consider the following evidence to the contrary:]
o According to the 2006 Independent Insurance Agents & Brokers of America's Best Practices Study, for agencies with revenues between $10 million and $25 million, the average revenue is $15.2 million. The average revenue per person for agencies in that same revenue range is $160,000.
oThe average revenue of the eight publicly traded brokers is $3.46 billion and average revenue per person is $183,000.
These results show that the big brokers, whose growth results mostly from acquisitions, obtain an additional $26,000 of revenue per person from that extra $3.44 billion in revenue, or an extra 0.00076% in economies of scale. This is immaterial, except on a gigantic scale. Even looking at the publicly traded brokers individually, we've found no evidence such synergies exist. Size has no correlation with growth or profitability for the publicly traded brokers.
Rather than really produce synergies, many acquisitions simply provide cover for layoffs and poor management. Instead of making hard decisions and admitting the firm is overstaffed, a buyer can buy another firm and announce the layoffs as if he or she were a genius.
I once reviewed several similar agencies that were in the same general location. The major difference among them was how the various management teams worked. The less efficient a management team was in running its business, the more it was willing to pay for another agency. In other words, it was willing to pay more to soak up the excess capacity caused by its poor management. Buyers already running good shops can't afford to pay as much for an agency because they can't shave off as much expense.
The buyers willing to pay the most felt pretty smart because they were able to cut so much cost. If they'd done a better job with their own businesses, they wouldn't have been willing to pay a premium for another agency–and maybe wouldn't have sought the acquisition in the first place. As a business writer once wrote, “Mergers and acquisitions are what you do when you run out of other ideas.”
The cost of such acquisitions extends beyond misplaced investment. Wasted sales opportunities are even more significant. In the middle of capturing these “synergies,” layoffs cause customers to be reassigned, and staff morale is damaged. Both lead to poor retention. Time spent reorganizing is not spent selling! How many sales are missed while the focus is on achieving false synergies?
Another synergy myth is that by purchasing more agencies, a buyer will increase its volume with carriers and, therefore, its profit sharing. But a study of 12 national and regional carriers' profit-sharing contracts showed that bonuses increased an average of just 0.0052 percentage points when premiums rose to $5 million from $1 million–not much of a synergistic gain.
This does not mean all acquisitions are unprofitable. Large agencies can sometimes achieve synergies by acquiring small agencies. Buyers may find a producer or other key people in the acquired agency who are just hitting their prime. Other unusual situations exist that can lead to large profits.
If agency owners hope to be more successful with mergers and acquisitions, they must be honest with themselves. Before making an acquisition, analyze your own agency. How well is it run? How will you improve the seller's management? Will the sellers stay or leave? If they stay, how will they suddenly become good managers? What's the advantage of acquiring a seller if the extra volume with carriers doesn't produce higher profit sharing? If an advantage exists, what's its real value?
Many buyers have overpaid for agencies in hope of correcting their own mismanagement. Successful mergers and acquisitions start with honesty and a willingness to look at how well and efficiently an organization is run. Before you consider growing your business by bringing the outside in, first grow it from the inside out. Get your agency in order in terms of its efficiency and management. Then folding in another agency will be easier, and the odds of success will be greater.
Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (709) 485-3868 or by e-mail at Chris@burand-associates.com.

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For The Manager: Don't fool yourself about synergies in acquisitions

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