Be Upfront And Personal, Broker Execs Advise

"For us, its gotten pretty easy. The due diligence is pretty basic, both financially and operationally. We can come to valuations pretty quickly," said Warren Vandervoort, corporate vice president and mergers-and-acquisitions director at Arthur J. Gallagher in the Itasca, Ill.

But for the seller, Mr. Vandervoort acknowledged, "this is likely to be one of the first times they've ever been involved in the sale of their company as well as merger and acquisition. To them, it is more all-encompassing."

Mr. Vandervoort advised that agencies involved in or just even considering selling to larger brokers should do their best to understand fully what would happen to their businesses, during and after the acquisition process. "They may not be comfortable with the process, and they may not be quite sure what the whole process amounts to," Mr. Vandervoort said. "But it's absolutely necessary to make sure that everybody comes on board knowing exactly what they can expect and not be surprised afterward." He added that his firm tries to make the entire process comfortable for agencies and that he tries to ensure that acquired agencies won't find any surprises in terms of new operating environment after the transaction is completed.

Brown & Brown's chief financial officer Cory Walker also recommended that all the parties involved "have got to lay all the cards on the table."

"Everybody's an adult, and you can't leave things to assumption. You have to basically say: 'Here are the facts. Do we agree on it? And do we work through it?'" Mr. Walker said.

Its also important that agencies make it clear to their potential buyers how much in valuations they are willing to accept. Mr. Walker said that Brown & Brown, as a rule, pays agencies five or six times their operating profit. "You've got to be very clear on what you expect and what they expect," he said.

"Make sure everyone's expectations are properly understood and aligned. That's probably the biggest piece of advice I could give to anybody," added Ed Bowler, senior vice president of corporate development at the Briarcliff Manor, N.Y.-based U.S.I. Holdings.

Another piece of advice Mr. Bowler offered agencies is to have a realistic expectation of how much they are really worth. He pointed out that much of the time, when negotiations fall apart it's because sellers have off-the-chart valuation expectations for their agencies.

"That's where the vast majority of the deals crater. But because there are enough transactions out there, the market is pretty well defined for purchase-price multiples," he said, adding that most brokerage firms would probably pay "just about the same price" for any given agency.

He recommended that when negotiating with large brokers, agencies shouldn't obsess too much over the purchase price since the negotiable price ranges are pretty narrow anyway. Instead, "they should also look at what would happen after the deal is completed, in terms of values that they would get to further grow the agencies."

Mr. Bowler also noted that he would advise sellers to find a partner that "they feel very comfortable with, and work with that person in good faith."

Reproduced from National Underwriter Edition, July 22, 2004. Copyright 2004 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.