Make Sure Your Acquisition Does Not Fail
10 TIPS for buyers and sellers to make the deal go through.
Fast Focus
- History offers valuable lessons for agency buyers and sellers.
- Hiring the right professional advisors can result in a better deal.
- There’s more to a good deal than a good price. Terms and integration plans matter.
While the insurance industry has had its share of problems, it has survived better than many other financial services sectors—AIG excluded. Although the industry is not immune to various aspects of the economic meltdown, companies continued to consolidate at a rapid pace. Last year, 307 M&A transactions were announced, a 10% increase from 2007. So as I predicted last year, when it comes to M&A, 2008 could still be referred to as “The Year of Consolidation.”
However, I am pretty confident that not all these deals will ultimately work out as well as the buyers or the sellers planned. In fact, I am sure that there were hundreds of additional deals that did not get consummated due to mistakes by both sellers and buyers. M&A deals are not simply the buying and selling of companies. Primarily, they are transactions between people, and as humans, we all make mistakes. Learning from our mistakes is what keeps us out of the jungle.
We expect to continue to see an active M&A marketplace in 2009, and your company may very well be facing the tough decision of whether to merge, acquire or be acquired this year. With that in mind, I want to share my on-the-job observations of how the M&A world works. May it help with your success if you’re facing a transaction during this turbulent year.
FOR SALE BY OWNER
If you’re thinking about selling your firm, you would be wise to understand just what type of a ride to expect. Yes, there are rewards, but risks are all around; it’s a bumpy, winding road with the finish line barely visible on the horizon. Here’s a top-10 list of important rules every agency owner should follow if they’ve decided to take this major step.
1. Seek professional guidance. While you may be skilled in the art of the deal in insurance, how many businesses have you sold? This is probably something you do once in your lifetime, and your goal should be to maximize the results. It’s often a mistake for agency owners to rely solely on the counsel of their accountant or company attorney. These advisors may serve you well in many ways, but the unique situation of selling an agency requires the experience of a professional who handles insurance agency transactions on a daily basis. Consider the many components to the acquisition process: business valuation, market assessment, preparation of offering memorandums, review of tax implications, due diligence and legal agreements, to name just a few. An investment in seasoned professionals will most likely result in a more lucrative overall deal—a reasonable trade-off for the additional cost incurred.
2. Commit to the process. Selling your business is a process. The first step, then, is to seriously examine the financial and non-financial objectives that are driving you to consider a sale. Once you decide it’s time to sell, you need to sign on for the entire process. Just like any strategic initiative, certain steps must be followed. There are no shortcuts to executing a successful deal.
3. Understand the value of your agency. Calculating the value of an agency falls somewhere between an art and a science. Acquirers use different methodologies and often will not disclose how they arrived at the value of your business. That’s why it is important for you to have a clear, realistic understanding of the value of your agency before you go to market. Know what your wish, want and walk numbers are ahead of time. This step will greatly enhance your ability to analyze an offer from a buyer and remove the emotion that may be attached to the transaction.
4. Be proactive. Do not wait for buyers to come to you. Be proactive and approach buyers under your terms and your timeframes. This will allow you to control the process and most likely will result in the most opportunities and the highest value. Create competition. Competition creates leverage, and leverage creates value.
5. Present your agency properly. Never just hand over your financial statements to a prospective buyer. While such a request may seem innocent, granting it will start you off behind the eight ball, and catching up is hard to do. Presenting your agency properly means preparing a confidential memorandum that includes a narrative description of the business; historical and pro forma financials; other organizational, financial and operational data; and the intangible aspects that are critical for a buyer to understand and evaluate. How you present your agency often makes the difference between an initial low offer and an attractive offer right from the start.
6. Understand the details. Sellers often focus only on price. But price is just one aspect of the transaction. Sellers need to understand not only the total price but how much is up front. More important, however, are the terms of your earn-out. Do you have to grow your bottom line 20% per year for three years to achieve your earn-out? How much control will you have to make day-to-day decisions? What overhead allocation costs will be charged to your firm? What are the terms of your non-compete and non-solicitation agreement? What are the terms of your escrow agreement? How about the representations and warranties you’ll be asked to make? The list goes on. Price is the easy part of the deal; the details often make the difference between a good and a great deal.
7. Negotiation and attorneys. Rely on your financial advisor to lead your negotiations and to tell you when to bring in your attorney. This is particularly important in the early stages of the letter of intent or term sheet. If you follow the “wish, want and walk” theory of negotiating, it will make the process much easier and you will remove most of the emotion that is attached to selling your agency. Too often I find agency owners either trying to negotiate themselves or, worse yet, turning the negotiation over to their attorney far too early in the deal. When you do involve your attorney, set parameters as to what are business issues versus legal issues—in other words, what the lawyer should and should not address. If you don’t, you will end up with large stacks of paper and an even larger legal bill.
8. Get your house in order. You have signed the letter of intent, and you let out a big sigh: the hard work is done! Well, not quite. Now comes the real fun: due diligence. If your advisors have done their job properly, you already have your house in order for this stage. The buyer’s team will review carrier contracts, financial records, IT, employment files, production reports, etc. They will want to validate your pro forma adjustments and verify that you actually own your book of business and that it is not subject to the rights of ownership by your producers or sub-producers. To ensure a successful, due diligence process so that the financial terms and structure do not get changed from your initial agreement, you need to have your house in order.
9. Reverse due diligence. Due diligence is a two-way street. You must perform your own reverse due diligence on the buyer. It is critical that you believe that the buyer’s operating model and culture is compatible with you and your agency’s culture. While many sellers may overlook culture, it is often the difference between long-term happiness and asking yourself six months after closing, “Why did I do this deal?” Your due diligence should include a visit to the buyer’s headquarters, meeting with management and key employees, and discussing the buyer’s plan of integration. Probably the most important step is talking to other agency owners who have sold to the acquirer. Talk to shareholders and some of their key employees and learn firsthand what the culture is like, how integration went and what changes took place. Change can be good, but only if you and your team are prepared for it.
10. Be ready for the long haul. Recognize up front that the selling process is not quick. It is not unusual for a transaction to take nine to 12 months. If you are not mentally and emotionally ready for the long haul, you reduce the odds of completing the transaction. During this time you still need to manage your agency for growth and profitability. While this sounds easy, it is not.
Following these 10 steps will take you a good way down that road toward successfully selling your agency. It’s a very big step, one that will alter not only your life, but your employees’ and your family’s lives as well.
BUYER BEWARE
Many great agencies have been built through successful acquisitions, but many others have struggled because of failed or poor acquisitions. While most agency owners start off with good intentions during their acquisition process, history offers us some simple, yet valuable, insights as to why acquisitions succeed or fail. Here, then, is our top-10 list of important rules for buyers.
1. Acquisition strategy. To complete a successful acquisition, a buyer must develop a comprehensive acquisition strategy. While all successful strategies need to include flexibility, it is primarily important to identify what to look for in an acquisition target. Taking the time to do this up front can save significant time and money in the future and provide the template and guiding principles for the strategy. The acquisition strategy should include such basic items as strategic fit, corporate culture, financial criteria, management strength, geographic markets and transaction structure.
2. Pricing rationale. Buyers must be prepared to discuss and explain their pricing rationale. The buyer’s ability to effectively communicate and negotiate based on a sound financial model is often a key factor in moving past pricing stalemates. Be prepared to discuss differences between your price and a seller’s perceived market value. Discuss issues such as working capital and escrows and how they affect the purchase price.
3. Flexibility and creativity. To maximize the probability of a successful transaction, 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. The ability to be flexible and creative often results in a deal price and structure that is “fair and reasonable” to both parties.
4. Due diligence. The most common shortfall in the acquisitions process is inadequate due diligence. Much more time is typically spent negotiating the deal versus conducting due diligence, yet post-closing surprises could have been avoided had the buyer performed better due diligence. At a minimum, due diligence should include comprehensive financial, operational, human resource, book of business and legal reviews by a team that, at the very least, includes representatives from senior management, operations, accounting/finance and legal along with experienced M&A advisors. Professional advisors can assist you in developing detailed due diligence checklists that help ensure that all areas are properly analyzed.
5. Professional advisors. Professional advisors focused on insurance agency M&A provide critical expertise and market knowledge that is invaluable in helping a buyer complete a successful acquisition.
6. Walk away. There is often 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 often buyers are financially stronger in the long run by not doing the deal.
7. Buying is selling. Buyers often believe 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: buying is selling. A major non-financial concern for a seller is to find the “right” buyer, and part of that calculation is 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.
8. Overestimating synergistic value. In determining value, buyers review both intrinsic value (the value of cash flows) and synergistic value. Synergistic value is incremental value achieved from enhancing financial performance through expense savings, increased revenues and operational efficiencies. However, my experience has taught me that even the most experienced buyers often overestimate synergistic value, leading to future performance that never matches up with projections the buyer expected to achieve. Be cautious and don’t take any shortcuts when trying to determine the synergies you expect to achieve in your next acquisition.
9. Nothing will change. 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 helps to get the deal completed, sellers often know that change will occur. Nobody likes change, but when properly communicated, change can have positive results. Be candid with the seller about the changes that you expect to make, both short- and long-term. In addition, obtain input from the seller regarding your intentions. Getting the seller’s feedback and having them part of the decision process goes a long way in obtaining “buy-in” and helping with the integration process.
10. The deal is done. While closing the deal is a milestone worth celebrating, an acquisition has 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 from a management standpoint. The single biggest mistake one can make is thinking the deal is done at closing.
Careful planning and strategy before embarking on the acquisition process will greatly enhance a buyer’s chances for success. Adhering to these basic concepts will help any buyer implement a successful acquisition strategy and avoid the many costly pitfalls that others have encountered.
For both buyers and sellers, the view to the horizon is important. In a year that is sure to be just as turbulent and unpredictable as the last, keeping a clear view of your direction and path is vital to success.
Robert Lieblein is a contributing writer and managing partner of Hales & Co. |
