In our June column we discussed the corporate strategic concept of selling up. We covered some of the basics involved in the decision-making process and some practical examples based on Harbor Capital Advisors' experience with client's selling up. After the practical decision is made to pursue a strategy of selling up, the next step is to implement that decision. In this article we will address the implementation aspects of the selling-up process.
An example that points out some of the difficulties faced by agents in executing a strategy of selling up is highlighted by recent discussions with a client of ours who had been approached by a potential acquirer. Our first question in this particular situation was to ask why the principal was considering this unsolicited offer? The answer was, "It seemed like something that should be considered." The next question we asked was how the principal would make a determination if this particular opportunity were the optimal opportunity?
At this point, we should clarify what we mean by optimal opportunity. In our view, the optimal opportunity would offer a number of answers to the seller's desires. It would certainly be a transaction that had the most promise of optimizing shareholder value, and it would address the seller's personal needs and desires, or personal "wish list" as we often refer to it.
The wish list should focus on several key issues:
* Time frame--This refers to the principal's time frame with regard to making a continuing commitment to the business. In some circumstances, the seller is willing to stay for the transaction period but would like to exit immediately after that. In other cases the seller may want to continue being active in the business but prefers to exempt from the day-to-day management and administrative responsibilities. In many cases the seller retains a strong desire to sell new business.
For example, one of our clients who is in the middle of a merger has been very successful running a property/casualty agency, while at the same time achieving success at selling life and benefits. This principal sees a merger as creating the opportunity to be free from day-to-day agency management responsibilities, thus providing the time to focus on selling life and benefits.
* Exploratory Process--The next step in understanding what optimal opportunity means involves uncovering the various opportunities that exist. This could include a possible merger. It could include selling into a larger organization and becoming a principal in that organization. The kind of opportunity that an agency principal is comfortable with starts to emerge from the various discussions in which the principals participate. We like to describe the exploratory process as an educational process.
The educational process helps in several ways as the personal wish list of our client is defined and clarified. Our client begins to understand the new opportunities being pursued by potential partners and begins to understand the successes that have been achieved by those partners. The client begins to understand the market relationships and other relationships that have been created by the principals of the potential partners' organizations.
Understanding the breadth and depth of new opportunities helps our client crystallize his/her own thinking with regard to what he/she really wants to do if the decision is to combine with another agency.
At the same time that our clients are exploring the type of organization they may be most comfortable partnering with, they also must recognize the need to ultimately create leverage in order to negotiate the optimal deal.
* Client Exposure--The role of Harbor Capital Advisors in this "leveraging" process is to expose our clients to corporate development opportunities that are consistent with the stated goals and desires expressed by our clients. The process of engaging in concurrent discussions with potential partners gives our clients the insight that they require to determine the best fit for their organization and for themselves. At the same time, this process gives our clients sufficient leverage to ultimately strike a fair deal by letting the market process indicate, in general, the terms of that deal.
In summary, these are examples of the considerations and approach taken by Harbor Capital Advisors to advise clients about executing a program of selling up. Agency principals should take a highly active approach and role in the process and not remain in a reactive mode. An active approach is synonymous with control of the corporate development process. Control includes being knowledgeable regarding the various types of corporate development opportunities that are available to an agency that has made the decision to sell up.
Once agency principals have made the decision to pursue outside opportunities, they are well served to explore the gamut of the opportunities for selling up. At Harbor Capital, we always recommend a thorough corporate development process as part of our philosophy in attempting to meet our clients' goals. *
The authors
Paul J. Di Stefano, CPA, CPCU, is the managing director and G. Edward Kalbaugh, BSE, MBA, is director of Management Advisory Services for Harbor Capital Advisors, Inc., a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger and acquisition representation, strategic and management consulting. They can be reached in New York at (800) 858-2732.
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