Two in three transactions erode shareholder value rather than increase it. Given these odds, how can you succeed with an agency acquisition strategy? This document by Tom Doran gives you a head start, with Best Practices principles to will help ensure successful — and profitable — acquisitions.
Several recent studies indicate that approximately two-thirds of business combinations prove to be economically dilutive for the acquirer’s shareholders. In our Mergers & Acquisitions practice, we have the opportunity to observe a number of agency buyers who can truly be described as 'best-in-class.' Although their strategies and tactics vary widely, these buyers exhibit certain common characteristics that result in highly effective acquisition programs, creating significant and tangible competitive advantages in a very crowded acquisition field. What exactly are the Best Practices that set this group of buyers apart?
- They have a plan and they can tell a story. Best-in-class buyers are strategic. They have specific plans for their businesses and evaluate potential agency acquisitions to ensure that they support the overall business strategy. These buyers don’t acquire revenues — they acquire strategic partners. The best buyers can translate their business strategies into compelling stories that will attract the types of partners who want more than top dollar for their agencies or someone to solve their perpetuation problems.
The best sellers are looking to improve their organizations through a strategic business combination. The best buyers can sell a selling agency on the merits of a business combination — they can communicate, clearly and succinctly, why life as a combined entity would be so bright. Why isn’t it surprising that the best buyers are typically best-in-class salespeople, too?
- They’re persistent. The best buyers are tireless in their pursuit of excellent acquisition targets. One agency president views the highest and best use of his time to be the pursuit of quality producers and agency acquisition targets. He schedules frequent casual breakfast and lunch get-togethers just to catch up, even if his targets have made it clear they’re not looking. The methodical, low-key pursuit of his quarry communicates an important message:
'Even if they don’t want to join us today, I’m going to make sure that I naturally come to mind as a serious and capable buyer when they’re ready to sell or make a change.'
- They recognize the importance of ‘fit.’ Although many agency buyers today are looking for a good deal or any deal, the best buyers recognize that there must be an excellent cultural and organizational fit for any acquisition to succeed. This isn’t to say that two business partners must be identical.
In fact, one compelling acquisition strategy is to acquire a partner who brings a new array of skills, abilities, products, and disciplines to your own organization. By fit, I mean a similar set of values and practices regarding the actual running of the business: ethics, work styles, work ethics, a vision for the future, perpetuation objectives, leadership styles, and so on. Because they recognize that the odds are stacked against them, best-in-class buyers look for a good fit on several levels to ensure the greatest likelihood for success.
- They acquire quality organizations rather than revenues. The better buyers in the marketplace focus more on the quality of the organizations they target than the revenue sizes of the agencies. Conversations with this class of buyer about specific acquisition targets inevitably focus on the quality of the employees, the client base, the carriers represented, the lines of business written, etc. Acquiring a large revenue agency that’s poorly run will only create a much larger headache for the buyer. Forget building critical mass — build an excellent organization instead!
- They’re disciplined. The best buyers walk away from deals once the economics or terms become unacceptable. This can be especially difficult to do in a competitive situation when multiple buyers are competing for a single agency. Remember the Greater Fool theory: there’ll always be a Greater Fool somewhere out there willing to make a deal that doesn’t make sense. Make sure you know when to let the Greater Fool win.
- They’re financially sophisticated. Surprisingly, many seat-of-the pants acquirers today still price deals using a simplistic multiple-of-revenues approach (see the Greater Fool above). This approach is perhaps the surest guarantee that an acquisition will prove to be an economic bust.
One of my partners had an encounter several years ago with a frantic agency owner who was sure his agency was worth two times revenues because that was the price he paid for his own acquisitions! Agency valuation is a precise discipline that requires a solid knowledge of finance, agency accounting, discounted cash flow analysis, alternative deal structures, tax law, risk analysis, and the insurance marketplace.
Although complex, agency valuation can and should be learned by buyers who plan to make agency acquisitions a core business strategy and frequent practice. For those who plan to do a deal here and there, I’d recommend the assistance of a qualified professional.
Best-in-class buyers also know how to judge, after the fact, whether or not a deal was successful economically (i.e. that it was accretive, rather than dilutive, to shareholder value). I know one buyer who views an acquisition as economically successful once it’s paid for! Would he think that paying $34,000 for a $17,000 Honda Accord represents a good deal just because he should be able to pay off the car note within two or three years?
- They set realistic expectations. Best-in-class buyers are realistic in their expectations, both when they’re pricing the deal and after the deal has been done. To price a deal based on the best possible set of assumptions means courting financial disaster. To expect too much, too soon, in the way of post-acquisition integration means courting operational disaster.
- They do their due diligence. During acquisition negotiations, it’s inevitable for the selling agency to put its best foot forward. Agency buyers get a view of the acquisition target that’s optimistic at best, and in the worst case, fraudulent. To further complicate the matter, many agencies have internal reporting systems that are flat-out wrong — which means that even a seller with the best of intentions can’t provide 100% complete information to the buyer.
A buyer who relies exclusively on the accuracy of the seller’s information might be in for a rude awakening after the deal closes. Best-in-class agency buyers engage in a thorough due diligence process before closing to ensure that everything taken at face value during negotiations is, in fact, true.
- They focus primarily on customers and employees. Immediately after consummating a transaction, the best buyers concentrate on the satisfaction of the acquired agency’s customers and employees. Many buyers kill the golden goose (customers, employees — and especially the revenue producers) to get to the golden eggs (post-deal consolidation cost savings). The best buyers make sure to take good care of the agency’s most important assets before focusing on potential cost savings.
An internal M&A specialist with General Electric told me recently that GE’s world-renowned M&A success results primarily from their post-deal integration practices. Many insurance agency buyers feel that they’ve done most of their work once the contracts are signed. The truth is that the post-deal integration process is where the real heavy lifting begins.
Although not an exact science, M&A is a discipline, like any other, that can be refined by applying proven principles. The application of the Best Practices principles in this article will help agency buyers dramatically improve the odds that their acquisitions will prove successful.