The agency management system of both players plays a critical role in making the deal.
With so many agencies looking to merge with or acquire other agencies, automation has become increasingly important-so important, in fact, that an agency’s automation can play a critical role in making or breaking a deal.
The fair market value of an agency is affected by its automation level to the extent that it improves productivity. Agency values are affected positively if automation use improves the quality of client service, account retention, carrier relationships, and the sales process. Timely and meaningful information that helps management to run an agency more effectively provides an extra bonus.
Automation should have these impacts on agency value:
- Increased productivity and profitability
- Better quality of service to clients, resulting in increased account retention
- Improved communications, submissions, and relationships with carriers
- More effective sales processes
- More information for better decision making
AUTOMATION: A KEY FACTOR
During the past 10 years, agents and brokers have become much more dependent on automation. Today’s agents not only depend on the traditional agency automation system for basic policy transactions and accounting, but also on a variety of software packages and computer systems that include sophisticated systems for interfacing, rating, word processing, presentations, telemarketing, E-mail for both internal and external communications, the Internet, specialized technical information, spreadsheets, time management, and human resources management.
Just as effective use of automation can enhance an agency’s value, ineffective uses can adversely affect the merger/acquisition process. If you’re considering acquiring or merging with an agency that hasn’t utilized automation effectively should consider the time and expense required to bring the agency in question up to speed. As anyone who has been through the process can attest, the time and expense required can be significant. In addition to the actual costs of equipment, software, conversion, and training, there are also hidden costs of work disruption — not to mention the frustrations of both the buyer’s and the seller’s staffs.
You must also investigate the agency management systems and software being used by both agencies. If the software or hardware systems are identical or compatible, life after the merger/acquisition will be a lot easier. On the other hand, if the systems are different, both agencies will need to make some major decisions. The two agencies can keep, operating with two separate systems; select one of the two systems; or go with a new system for both. These are major decisions that will affect the operations of both agencies and the financial results of the transaction.
Although selection of the agency-management software system(s) is important, other factors are involved. Decisions about training, data conversion, and procedures must be made, each with a significant impact on the ultimate success of the merger or acquisition. As many agencies can attest, changing an automation system can be the “best decision ever,” or it can almost devastate an agency and its staff.
In a merger or acquisition, these factors are basic to system selection:
- Basic system being used
- Software (agency management and others)
- Hardware
- Training
- Data conversion
- Procedures
Agencies anticipating future acquisitions should keep those points in mind when making automation decisions for their own systems. You’ll need to consider the capacity of the system, its ability to handle multiple locations, multiple profit centers and insurance companies.
TO UPGRADE OR NOT TO UPGRADE?
Before deciding on an acquisition or sale, evaluate current automation systems and operations on a cost-benefit basis. .. An investment in automation might be helpful’ if you choose not to use the selected system — even a relatively new one — software and/or hardware might be of little value. If this happens, you might need to write off the automation investment, which will depress the sales price.
An agency anticipating a sale in one to three years might not be justified in making a significant investment in automation. However, a unique situation, such as knowing the identity of the buyer and the system being, might cause a change in plans. Sometimes a significant investment is justified, even if there’s a possibility that the acquiring organization doesn’t have the same system. If there’s enough time to see the benefits in productivity that a good automation system can provide, the sales price should reflect a sufficient return on the automation investment.
Obviously, acquisitions and mergers are executed for many reasons other than the compatibility and/or effective use of the automation systems. At the same time, anyone who ha been through a significant acquisition or merger knows that those problems can lead to major headaches. Mergers and acquisitions can be a distraction or result in huge expenditures. Agencies thinking of future acquisitions or mergers should look carefully at all facets of the automation issue.
For a successful merger or acquisition, I’d recommend taking a thorough look at the value of the organization under consideration. The time and money needed to finalize the transaction must also be carefully assessed.
As you can imagine, the conversion process is a major undertaking that requires a major investment in planning, cooperation, and verification. It’s all worth it, though, when the new users begin to work on a new system with the customers’ records already entered. This, combined with an effective training program, can greatly reduce the stress usually associated with a merger or acquisition.
- Designate a project manager to guide the efforts of the conversion team.
- The project manager will help make necessary decisions, keep things on track, and coordinate activities of the two agencies and the two automation vendors.
- Before the data conversion, clean up data in the converting agency’s records as much as possible, checking the information for spelling, consistency, and accuracy. Do this by printing out a database listing of the records and specific fields to be converted. If you choose not to convert inactive clients, insert a special “do not convert” flag in the customer’s record.
- It’s a good idea to include special coding in each converted record to show that the record was added during the conversion process. You might also want to use a unique series of numbers for the converted agency’s clients and producers. This is useful for tracking the activity of new clients and their policies, and it can explain unusual field entries if something doesn’t translate as anticipated.
- Invoice transaction records can be converted either as memo entries for reference, or as closed and open transactions. Carrier payable records or open accounts receivable can be converted into the new system as open items.
- Training for new users should be easier than the original system training because specific agency procedures are already in place. Whether using vendor trainers or in-house staff, it’s a good idea for new users to be taught the actual agency procedures and code numbers to be used with the new system.