Lessons Learned From Past Acquisitions

The strategy should include such basic items as industry sector; location of target; strategic fit; corporate culture; financial criteria (for example, commission revenue production, loss ratios, retention rates, gross profit and earnings); management strength; geographic markets; transaction structure, which involves total price, notes and earn-outs; and how the deal will be funded.

Buyers must be prepared to discuss and explain their pricing rationale. The buyers ability to effectively communicate and negotiate based on a sound financial model is often a key factor in moving past pricing stalemates.

Arguing higher versus lower is a no-win situation. The buyer should be prepared to provide a broad market and regional comparison with current pricing to help support valuation rationale.

The acquisition parties should discuss issues such as working capital and capital expenditures or additional investment requirements and whether they impact the purchase price. Therefore, the buyer should be prepared and have done his or her homework so that he or she can effectively articulate the pricing rationale and deal structure.

To maximize the probability that a transaction will be successful, buyers need to be flexible and creative when developing alternative deal structures. Alternative structures often allow both parties to reach a better deal and move much of the focus away from a zero-sum pricing argument.

Both parties in acquisition negotiations often overuse the term "win-win." But the ability to be flexible and creative often results in a deal price and structure that is "fair and reasonable" to both parties.

The most common shortfall in the acquisition process is inadequate due diligence. When buyers are asked how time was spent during the process, they will generally find that much more time was spent negotiating the deal versus conducting due diligence. Many post-closing surprises could have been avoided if the buyer had performed better due diligence.

Due diligence takes on many forms. At a minimum it should include comprehensive financial, operational and legal reviews. The buyers due diligence team should have representatives from senior management, operations, accounting/finance and legal along with experienced M&A advisers.

Professional advisers can assist the buyer in developing detailed due diligence checklists that help ensure that all areas are properly analyzed. Too many buyers make the costly mistake of not engaging these experienced and qualified professionals.

These professionals include attorneys, accountants and investment bankers.

Buyers fail to realize that the cost of professional advisers is minimal compared to the cost of a failed or poorly executed acquisition.

Acquisition expertise is not part of the core competency of most agency owners and is not something they do everyday. Professional advisers provide the critical expertise and market knowledge that is invaluable in helping a buyer complete a successful acquisition. In the long run, the cost of advisers, including any costs incurred for acquisitions that are not completed, may be the best investment a buyer can make.

At the end of the day, the objective is to do the right acquisition at the right price and terms. Remember the old saying, "penny wise, pound foolish." Do not make this mistake when it comes to dealing with professional advisers.

There is a tendency for buyers to become emotionally involved with a deal as time, energy and money are invested. Not every transaction should be completed, and many buyers would be better served if they walked away from the opportunity.

Often a buyer is financially stronger in the long run by not doing a deal. This cost is not measured just by the cost of the acquisition, but by the ongoing financial and intangible costs that can far exceed the capital investment of a transaction. Keeping an objective view of the possible acquisition and remembering what the key criteria are for doing a deal are critical.

A buyer may spend too much time and energy speculating on what the sellers motivation is for selling. It really isnt that important. What is important for the buyer to understand is what the impact on the agency will be after the transaction is completed and the seller exits the agency.

Most sellers will tell you that they will stay after the acquisition is completed, but reality changes over time. Whether it is six months, one year or some other time frame, buyers need to understand the impact on the agency, if and when the seller exits the agency.

Relationships with customers, carriers and, most importantly, employees need to be understood and strategies need to be put in place to minimize the disruption of the agency once the owner exits.

A buyer often has the mentality that if they offer the highest price they will be the successful party. Taking such a view violates one of the most basic principles of negotiation strategy, and that is buying is selling.

One major nonfinancial concern for a seller is to find the "right" buyer and how the buyer will treat employees once the acquisition is completed. A buyer should never lose sight of the importance of being thoughtful and respectful during the acquisition process.

Sellers hire professional advisers because they realize that while they may be very good at running an agency, selling their company is not something they do every day. Buyers need to recognize the role of a sellers adviser and make sure they deal directly with the adviser and not attempt to cut them out of the process.

An underutilized strategy for the buyer is to pay the adviser a fee as part of the purchase price. Buyers need to recognize that adviser fees are part of the overall "transaction price" regardless who pays the fee. A buyer may reap significant goodwill by offering to pay the advisers fee, which may result in the difference between a successful and failed acquisition.

Buyers often make the mistake of telling the seller that nothing will change after the acquisition. While the buyer may think that such a promise may help in getting the deal completed, sellers often know that change will occur. Nobody likes change, but when properly communicated, positive results can happen from change.

The buyer should be candid with the seller about changes expected. He or she should obtain input from the seller regarding the buyers intentions. Getting the sellers feedback and having them be part of the decision process goes a long way in getting "buy in" and helping with the integration process.

Everybody remembers the excitement of closing the deal and thinking the deal is done. While closing the deal is a milestone, and one should be congratulated on completing the acquisition, the reality is that this is the easy part.

An acquisition is two-parts: closing the deal and integrating the deal. Unfortunately, the integration aspect of the acquisition process is the most difficult one. Most acquisitions fail, not because of the price paid, but because of the failure to properly integrate the organization financially, operationally and managerially.

Careful planning and strategy before a buyer embarks on his or her acquisition approach will greatly enhance the chances for success. Adhering to the basic concepts discussed will help any buyer implement a successful acquisition strategy and avoid the many costly pitfalls that other buyers have encountered.

Robert J. Lieblein, is managing principal and Steven S. Wevodau is principal of WFG Capital Advisers, (www.wfgca.com) a consulting firm to the insurance and financial services industry based in Harrisburg, Pa.

Reproduced from National Underwriter Edition, June 9, 2003. Copyright 2003 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.