While the financial aspects of agency transactions may appear to drive the process, most often the outcome is influenced by the perceptions of the individuals involved during the courting and negotiation process. In other words, the final decision to enter into a transaction is made on a gut level in answering questions that are personal in nature. How do I feel about the individuals involved on the other side of the transaction? Are they credible? Can I work with them? Will the support of the new organization help with my personal success going forward? These types of questions must be answered as a part of the process of the initial exploratory discussions.
The general issue of credibility always surfaces in some manner based on how the principals handle the negotiations. An attempt by either party to get the edge on the other during the negotiations will become readily apparent to both and send a strong signal that may have the effect of stifling the negotiations.
The problem with sending wrong signals at any point in the process, even inadvertently, is that the other side becomes sensitive and begins looking for negative signals. In most cases the party receiving negative signals will not confront the other side. Instead those signals will be remembered and will be used later in evaluating the person's comfort level with the deal.
One set of negotiations which comes to mind involved an agency that marketed niche property and casualty products. The agency was a target to be acquired by a larger agency. The larger agency wanted the selling principal to run the combined program department. However, the principal of the larger agency sent a signal that the principals of the acquiring firm would prefer a straight buyout rather than inviting the seller in as a partner/shareholder--that only if pushed would the larger agency embrace the selling principal as a shareholder.
They never got the chance. The seller was willing to take a less lucrative financial deal in this case because he valued the potential to be a partner in the larger firm. But he decided that the principals of the larger agency did not have a common view about his involvement and he did not want to spend the next several years acting as an arbitrator between the acquiring partners.
As illustrated above, the impressions conveyed during the courting and negotiation of a deal are obviously very important. But in addition to those intangible personal aspects, there are many practical operational aspects to consider. For example: How does the acquiring agency function internally? How are accounts serviced? What support is available to cross sell accounts? How aggressively are collections pursued?
Also, if a retention deal is being considered, the marketing and servicing abilities of an agency are equally important. The selling principal who intends to remain active is facing a number of issues. One of the primary issues is that any time two agencies are combined, a number of employees may not be retained. This may have a profound effect on marketing and service.
Compounding these issues may be the fact that there are offers from several potential acquirers. Agency principals must be very careful in managing multiple solicitations and negotiations. No buyer wants to feel that his/her offer is being used as leverage with other buyers. However, in most situations, multiple opportunities and leverage are important to the overall process of finding and making the best deal. Sellers need to become aware of and be comfortable with the best opportunities available before making commitments to any one buyer, especially if that commitment excludes other offers from being pursued.
While the intangible aspects mentioned above are being addressed, it is equally important to address the financial aspects of the transaction as early as possible. Normally, most potential acquirers make offers that are within a reasonable range, and that allow for reasonable negotiation. However, we have seen numerous situations in which an opportunist makes a ludicrous offer to a seller after holding the seller at bay for months. This type of potential buyer may have an aversion to risk or may simply be trying to obtain the acquisition at an unreasonable price. Usually this type of buyer will attempt to structure the deal so that all risk is left with the seller, while at the same time structuring an offer that does not take into account that the buyer has assumed no risk.
With the above in mind, it is also important to understand that managing the deal process must take into consideration that all variables are handled simultaneously. The following questions should be addressed:
* Which acquiring organization will hold the best promise for the selling principals in terms of being a platform for growth? The answer to that question must include an evaluation that includes looking at what the acquiring agencies are doing to grow their own business.
* What is the quality of staffing at the acquiring organization?
* What is the success of the acquiring agency in generating new business?
* What are the carrier relationships like? How good is the fit with both agencies in terms of key carriers?
During this process, intermediaries such as Harbor Capital Advisors, can bring experience and objectivity to bear on facilitating the transaction.
In summary, for deals to move forward smoothly toward a satisfactory transaction, both the buyer and the seller must keep the following points in mind.
1.) Remain unencumbered in order to educate yourself and to pursue the best opportunities.
2.) Be sensitive to sending both positive and negative signals throughout the courting and negotiation process.
3.) Address practical issues such as financial and operational matters as early as possible.
4.) Remain flexible and capable of managing multiple discussions and negotiations.
5.) Stay focused on what you want from the deal.
The authors
Paul J. Di Stefano, CPA, CPCU is managing director and G. Edward Kalbaugh, MBA, is director of management advisory services for Harbor Capital Advisors. Harbor Capital Advisors is a New York-based 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 at 800-858-2732.
©COPYRIGHT: The Rough Notes Magazine, 1999