Highest Price Isn't Always The Best Offer

Many sellers might think, "The higher the price, the better. Right?" If the deal is cash and walk away, this is true. However, if the deal is based on renewals or stock, it is critical to the seller whether or not the buyer's logic is solid.

If the buyer does not meet their dreamily wrong projections, the seller will never see all, or maybe any, of the money they were expecting.

This is exactly what happened to many, many funeral-home owners who sold their companies to big consolidators. Stock prices have dropped drastically and many owners who sold their companies for stock have lost big money.

In our industry, I believe this possibility is especially strong with banks. Based on what I read, many banks' financials are not as solid as many people (including some bankers) believe. Also, based on what some banks are paying for agencies, one has to wonder if they are hallucinating.

Another reason to warily accept a high price is that many buyers believe they can afford a high price only because they run their own agency so poorly.

For example, a buyer might offer to pay 40 percent more than any other buyer because they think they can cut 40 percent of the staff, 100 percent of the rent and utilities, and achieve many other economies of scale. They can cut staff because they themselves are overstaffed. They can cut rent because they have excess space from perhaps other growth plans that have failed.

So if they cannot manage their own agency well, what makes you think they can manage your agency well? If part of the price depends on their managing your agency and/or their own agency well, do you really think you will get all your money? This problem is amplified if stock exchanges are involved.

Buyers often mistakenly think they can afford to pay extra because they will eliminate so much overhead. Very often, however, they are not calculating their costs correctly.

For example, a buyer decided he could afford the seller's high price because he had extra staff and therefore could lay off some of the seller's staff, resulting in higher margins. In other words, he had staff sitting around just twiddling their thumbs, so the buyer's projections did not apply any staff wages toward the cost of the acquisition.

However, the cost of his staff should have been considered part of the acquisition rather than treating their wages as free. Cash flow projections should show the real cost of staff.

A more important question should be answered before closing a deal: If the buyer runs an agency where staff members do not have enough work, is an acquisition the answer to better profits, or is better management the smarter first step?

To sellers looking for high prices, consider the likelihood of actually getting all your money. Lower offers might actually pay better in the end. This is because you are possibly more likely to actually get your money.

To buyers offering high prices, think hard about the economies of scale you are projecting and whether those economies will really be achieved. Also consider whether better management is a better answer to improving productivity and profits. Usually, it is.

Few acquisitions warrant the prices many buyers are paying. A difference exists between merely growing, and growing profitably. Which do you prefer? Buyers and sellers should both respectfully decline invitations to join anyone's hallucinations.

Chris Burand is president of Burand & Associates, LLC, a consulting firm for independent agencies based in Pueblo, Colo. He can be e-mailed at chris@burand-associates.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 19, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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