Agents Seek M&A Measures For Success

In addition, these M&A "Best Practices" create significant and tangible competitive advantages for buyers in a very crowded acquisition field.

What exactly are the "Best Practices" that set this group of buyers apart?

They have a plan and they can tell a story.

Best-in-class buyers are strategic. They have specific plans for their businesses, and potential agency acquisitions are evaluated to ensure that they support the overall business strategy.

These buyers do not acquire revenues–they acquire strategic partners. The best buyers can translate their business strategies into compelling stories to attract the types of partners who are looking for more than top dollar for their agencies or someone to solve their perpetuation problems.

The best sellers are looking to improve their organizations through a strategic business combination. The best buyers can "sell" a selling agency on the merits of a business combination. They can communicate, clearly and succinctly, why life as a combined entity would be so bright. Why is it not surprising that the best buyers are typically best-in-class salesmen, too?

They are persistent.

The best buyers are tireless in their pursuit of excellent acquisition targets. One agency president views the highest and best use of his time to be the pursuit of quality producers and agency acquisition targets. He schedules frequent breakfast and lunch get-togethers–very casual, just to catch up, even if his targets have made it clear theyre not looking.

The methodical pursuit of his quarry on a low-key basis communicates a very important message: "Even if they dont want to join us today, Im going to make sure that I naturally come to mind as a serious and capable buyer when they are ready to sell or make a change."

They recognize the importance of "fit."

While many agency buyers today are looking for a "good deal, any deal," the best buyers recognize that there must be an excellent cultural and organizational fit for any acquisition to succeed.

This is not to say that two business partners must be identical. In fact, one compelling acquisition strategy is to acquire a partner who brings a whole new array of skills, abilities, products, and disciplines to your own organization.

By fit, I simply mean a similar set of values and practices regarding the actual running of the business–business ethics, work styles, work ethics, a vision for the future, perpetuation objectives, leadership styles, and so on. Recognizing that the odds are stacked against most deals proving to be successful, best-in-class buyers look for a good fit on many different levels to ensure the greatest likelihood for success.

They acquire quality organizations rather than revenues.

The better buyers focus more on the quality of the organizations they target than the revenue sizes of the agencies. Conversations with this class of buyer about specific acquisition targets inevitably focus on the quality of the employees, the client base, the carriers represented, the lines of business written, etc.

Acquiring a large revenue agency that is a poorly run organization simply results in a much larger headache for the buyer. Forget building critical mass–build an excellent organization instead.

They are disciplined.

The best buyers walk away from deals once the economics or terms become unacceptable. This can be especially difficult to do in a competitive situation when multiple buyers are competing for a single agency.

Remember the "Greater Fool Theory"–there will always be a greater fool out there somewhere willing to do a deal that doesnt make sense, so make sure you know when to let the greater fool "win" the deal.

They are financially sophisticated.

Surprisingly, many seat-of-the pants agency acquirers today still price deals using a simplistic multiple-of-revenues approach (see the "Greater Fool" reference above). This approach is perhaps the surest guarantee that an acquisition will prove to be an economic bust.

One of my partners had an encounter several years ago with a frantic agency owner who was sure his agency was worth two times revenues because that was the price he paid for his own acquisitions!

Agency valuation is a precise discipline that requires a solid knowledge of finance, agency accounting, discounted cash flow analysis, alternative deal structures, tax law, risk analysis and the insurance marketplace. Although complex, agency valuation can and should be learned by buyers who plan to make agency acquisitions a core business strategy and frequent practice.

For those who plan to do a deal here and there, the assistance of a qualified professional is highly recommended.

Best-in-class buyers also know how to judge, after the fact, whether or not a deal was successful economically (that it was accretive, rather than dilutive, to shareholder value). I know a buyer who views an acquisition as economically successful once its paid for! Would he think that paying $34,000 for a $17,000 Honda Accord represents a good deal simply because he should be able to pay the car note off over two or three years?

They are realistic in their expectations.

Best-in-class buyers are realistic in their expectations, both when they are pricing the deal and after the deal has been done. To price a deal based on the best possible set of assumptions is to court disaster financially. To expect too much, too soon, in the way of post-acquisition integration is to court disaster operationally. The best buyers set realistic expectations, both before and after the deal is done.

They do their due diligence.

During acquisition negotiations, it is inevitable for a selling agency to put its best foot forward as it "sells" itself. Agency buyers are provided with a view of the acquisition target that is, in the best case, optimistic, and in the worst case, fraudulent.

To further complicate the matter, many agencies have internal reporting systems that are flat-out wrong. This being the case, even if the sellers desire is to provide 100 percent complete information to the buyer, it cannot be done. If a buyer is relying exclusively on the accuracy of information provided by the seller, he might be in for a very rude awakening after the deal is inked.

Best-in-class agency buyers engage in a thorough due diligence process before closing to ensure that everything taken at face value during negotiations was in fact true.

They focus primarily on customers and employees.

The best buyers focus primarily on the satisfaction of the acquired agencys customers and employees immediately after a transaction is consummated.

Many buyers kill the golden goose (the customers, the employees–particularly the revenue producers) to get to the golden eggs (post-deal consolidation cost savings). The best buyers make sure that the most important assets of any insurance agency are well cared for before turning their interests towards any cost savings that might be achieved.

Many insurance agency buyers feel like their work is largely completed once the contracts are signed. The truth is that the post-deal integration process is where the real heavy lifting begins.

Although not an exact science, executing mergers and acquisitions is a discipline, like any other, that can be significantly improved upon through the application of proven principles. The application of the "Best Practices" principles outlined here will enable insurance agency buyers to dramatically improve the odds that their acquisitions will prove successful.

Tom Doran is a principal with Reagan Consulting, an Atlanta-based management consulting firm that that developed and produces the "Independent Insurance Agents of America Best Practices Study." He can be reached at tom@reaganconsulting.com.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 10, 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.

Contact Webmaster