Before becoming an acquisition target, your agency must first appear on a buyer's radar screen. How does an agency become an acquisition target? Sophisticated buyers essentially go through a four-step process to identify acquisition targets.
Before becoming an acquisition target, your agency must first appear on a buyer's radar screen. How does an agency become an acquisition target? Sophisticated buyers essentially go through a four-step process to identify acquisition targets.
First, a buyer develops business goals and strategies that address factors that it perceives as critical to success. These may cover areas such as establishing or reinforcing market presence, improving financial performance, aligning products and services, or strengthening the organization's perpetuation-production, service and management.
Once goals and strategies are defined, a buyer develops initial screening criteria that narrow the universe of potential targets. These criteria normally include geographic preference, revenue size, financial position, products or services available and special knowledge or capabilities.
With this narrowed universe established, a buyer then develops its prospect list, using either private sources of information or those of a third party engaged to accomplish the acquisition search.
The last step to completing a final list is to assess the reputation and validate financial information for each agency.
Focusing on specific targets
Now that selected agencies are on the radar screen, a buyer begins approaching priority targets with the intent of determining if a transaction is feasible.
This feasibility assessment, called "due diligence," comprises a series of detailed reviews. The following list highlights some of the common criteria assessed.
* How quickly is the investment paid back?
* What is the dilution of earnings per share?
* How significant is the cost savings potential?
* Is there a history of positive earnings growth? Can it be sustained? For how long?
* Are financial ratios favorable?
* Is working capital sufficient?
* Do synergies exist?
* Will restructuring be required?
* Can cost savings be realized? How soon?
* Are markets favorable over the long term?
* Are key accounts at risk?
* How is seller committed to perform?
* Do earn-out and pricing structures work?
Large buyers typically have preset ideas regarding answers to these questions and leave little room for negotiation in the transaction. For example, they usually determine the maximum value, price and terms, then leave it to the seller to decide if future opportunities make the deal worthwhile.
So what's in it for sellers?
A seller's reasons for selling usually govern his/her expectations regarding the deal transaction with a larger buyer. However, the most common reasons for selling include consideration of the potential for opportunity, the need for perpetuation and estate planning, and the owner's retirement.
Some of the benefits associated with belonging to larger agency or broker organizations include: the ability to establish a certain value and capitalize on the increasing value of equity in the buyer's organization; access to capital and markets; and being part of a larger support structure.
How does a small agency get the best deal?
Large buyers employ experienced professionals to represent them. Sellers should do the same.
Notwithstanding the prior statement that large buyers leave little room to negotiate, it behooves the seller to negotiate the best deal possible; and that requires an experienced intermediary who has the seller's interests in mind. In addition, there is a complex variety of taxable and tax-free structures to consider for both sides.
In structuring and negotiating deals for over 15 years involving transactions of all sizes, the principals of Harbor Capital Advisors have found that most parties to a transaction honestly strive for a true "win-win," simply because it make good business sense.
And one of the reasons that a
win-win makes good sense is that the deal isn't necessarily over when the contract is signed. Usually that's just the start. No matter how well a deal is structured, everyone has different perceptions and expectations, which affect performance and results. Therefore, Harbor Capital Advisors often remains involved in the transition, ensuring that integration is smooth and complete and that acquisition objectives are accomplished in a timely manner.
Summary
Agencies that are thinking about selling need to consider how large buyers find their targets and what they look for in making acquisitions. Equipped with this information, agency owners can begin to plan and structure their agencies so they are on the radar screen and in the focus of potential buyers. Only then are owners in a position to sell. And only then are they in a position to negotiate the best deal. *
The authors
Paul J. Di Stefano, CPA, CPCU, is managing director; and G. Edward Kalbaugh, MBA, is director of management advisory services of Harbor Capital Advisors, Inc. Harbor Capital is an investment bank and consultant to the insurance industry. They can be reached by e-mail at harborcapitaladvisors@banet.net or by phone at (800) 858-2732.
©COPYRIGHT: The Rough Notes Magazine, 1999