Planning to Grow: The Art of Agency Acquisition, Part One

By | December 6, 2004

Growing a firm through acquisition is somewhat like negotiating slippery winter roads: to do it well, one must know the terrain and current conditions and be extremely skillful. It’s not so wise to just jump in the car and slam the foot on the accelerator.

Today’s market trends make a solid acquisition strategy even more vital. Agency consolidation is occurring at record-setting levels. Through Sept. 30, there were 175 announced transactions. Compare that to 182 for the entire year in 2003 … that’s a 30 percent growth trend. Ultimately meaning there will be competition for the most desirable acquisitions.

It’s probably clear why this trend is taking place: product rate stabilization has flattened revenues, and increased competition has further eroded agency values. Also, the low (but rising) cost of capital makes growth through acquisition tempting.

Some agency owners want to grow, but they do not approach that desire systematically.

Some agency owners want to grow, but they do not approach that desire systematically. Instead of drawing up a clear, well-reasoned plan, they simply decide that an acquisition would be the best (or easiest) way to enhance their position in the market, and then sit back and wait for a good prospect to appear. That’s pretty reactionary, and any salesperson will say that such an approach won’t lead to the Top Performer of the Month plaque. A strategy is needed.

Prospecting for acquisitions
The first step is to consider available prospects. Most agents may think they know their marketplace, but prospecting and evaluating the market opportunities is often easier said than done. Considerations include how to leverage a current platform and whether to expand the product mix. Is it desirable to seek an increase in market share within a territory, or expand beyond current markets?

Set your parameters so staff or the hired gun knows what they are looking for. The good acquisition candidate must have the right mix of people, carrier relationships, customer base and technology.

The agency staff must have a desirable mix of experience and reputation. The business must be spread across profitable lines with stable carriers. And, the technology platform must be sound, up-to-date and conversant with the acquirer’s own agency.

The firm must be healthy. It must have a solid history of financial performance. There must be good potential for revenue and profit growth, and the firm’s culture must be able to be integrated with the acquirer’s own agency. Finally, the current owner’s expectations need to be reasonable. These last two may be the biggest sticking points.

Avoid a culture clash
Possibly the most vital consideration is whether an acquired company will provide the right cultural fit.

It is important to evaluate this up-front. How will different leadership styles or management practices be addressed? What are the “sacred cows” or special exceptions that might come with buying a particular firm? If two firms are generally a good fit and these problems are addressed early in the process, often a middle ground can be found to overcome the issues and a palatable solution will be revealed. Then there is the issue of managing expectations.

Potential misunderstandings, especially monetary in nature, must be addressed and dispensed with early on. For instance, both parties must agree to a method of valuation. An inflated self-worth by the principal of an agency being acquired must be brought into the realm of realism. Market value, and the components included in the calculation, must be unambiguous.

Prospective incentives, and post-transaction compensation, must be clearly delineated. All these elements are especially important when the transaction includes incentives and earn-outs tied to future performance.

How does an agency handle all these steps and thoroughly prepare their firm for evaluating potential acquisition targets? The work won’t get done by itself. The firm must field a savvy acquisitions team.

Assembling the team
A typical M&A (merger and acquisition) team includes senior leadership from within the firm and targeted external experts to handle legal and financial details.

Internally, the acquiring company’s CEO must be involved. He or she is the voice of the buyer and the strategic decision-maker. The company’s CFO or controller will be tapped to answer the financial questions, and the head of operations must be a key player too, as it will fall to that person to determine whether successful integration can be achieved. As mentioned earlier, this may be the most important decision to be made.

There is a big difference between just making a transaction, and making it successful.

A recent study by The Boston Consulting Group determined that 61 percent of transactions between 1995 and 2001 actually destroyed shareholder value. Having a complete and expert M&A team is the balancer between success and failure.

Typically, a company will bring in an attorney, a financial advisor and an accountant or tax advisor. These three specialists provide the best support for the M&A team to complete a successful evaluation that will lead to an acquisition. Can the work be done internally? Possibly, but many small to medium-size firms do not have the organizational structure or staff time to expertly fill all the necessary roles.

Conclusion
This first article in a two-part series on “The Art of Agency Acquisitions,” only scratches the surface of what it takes for a company to successfully play in the acquisitions game. There is much more at stake than whether the home team disappoints its fans. The future viability of the agency company may well be at risk. That’s why it is vitally important to make sure thorough knowledge of and access to all prospects is secured.

Set up an evaluation matrix that includes essential components needed to make the acquired company add shareholder value. Make certain the acquired company’s culture will mesh with acquirer’s own agency, and that the acquirer and the seller view the transaction under the same terms. Assemble a crack team of experts and key personnel that can be relied on to make sound, knowledgeable recommendations and decisions.

Then be ready to jump in the car and hit the road to acquisition. Well, almost.

Part two of this article, to appear in Insurance Journal’s Jan. 3, 2005 issue, will address the issues of pricing, structuring the purchase, conducting due diligence, integrating the purchased firm, and life after the deal.

Steven S. Wevodau, managing principal of WFG Capital Advisors (www.wfgca.com), has extensive experience in mergers, acquisitions
and strategic consulting. He may be reached at (717) 780-7802 or swevodau@wfgca.com.

Topics Mergers & Acquisitions

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