In one way or another, most agency owners eventually find themselves considering a merger or acquisition. The owner may initiate casual conversations with the principals of another agency about the possibility of one day combining the two agencies, or the owner may embark on a full-blown acquisition search where many agency targets are actively courted.
One thing is certain: The process of courting and negotiation is just one part of the effort required to successfully consummate a transaction. From Harbor Capital's unique vantage point, we realize that the real work comes after a deal has been "inked." The extent of that effort depends on the relative sizes of the agencies involved, and on their respective philosophies. For example, one of our clients recently asked us to advise him on a small acquisition he was contemplating. Our client's agency generated approximately $1,200,000 in commission income. The smaller agency he was targeting had about $300,000 in commission income. After having spent almost six months courting this target, constructing an offer "too good to refuse," our client began to have second thoughts about consummating the transaction.
Our initial reaction was, "What will this transaction do for your agency?" The client's offer was extremely attractive from a financial standpoint, but it didn't take account of differences in the two organizations' philosophies or address the question of what the new, combined entity would look like. We pointed out that the real work associated with the deal would come after the close. We thought that if our client were tied up integrating an operation that did little for his business, he would be forgoing opportunities that could prove more lucrative to the organization.
That example illustrates the point of this article: An agency owner not only must weigh the financial aspects of an acquisition, but also must consider how the combined organization will function.
Another client had been offered capital to build a regional organization. His financial rewards would be based on his ability not only to acquire other agencies, but also to grow his existing agency as quickly as he had in the past. During a lunch with the investor, our client asked an interesting question: "If I am distracted by the acquisition process, how can I at the same time maximize my internal performance?"
That is a question all agency principals should ask when contemplating an acquisition: Do I understand what is involved in integrating two agencies? A key challenge is to create a harmonious and productive work environment for two groups of employees from different cultures and to develop an efficient reporting structure for the combined organization.
A major reason to merge with or acquire another agency is to consolidate markets. Moving books of business carries its own set of problems. Further, issues invariably arise regarding servicing considerations.
Employees can become extremely anxious during a transition, and this may result in the loss of key people. People are the heart of an agency. Replacing experienced employees is difficult at best. Principals must devote substantial amounts of time and effort to ensure a smooth integration of staff.
The bottom line is, when contemplating a deal, don't just look at the financials; consider the philosophies and cultures of the merging entities as well as the raw numbers. Keep in mind that any transaction involves an opportunity cost. Diverting time and effort from a successful agency operation to integrate a new acquisition presents major challenges. Can you successfully pursue both goals? If not, is it worth your while to proceed with an acquisition?
Harbor Capital has years of experience in facilitating agency assimilations, and we believe the most important aspect of the deal is ensuring that both entities have the same goals. If your philosophies and objectives are complementary, you will enjoy a successful transaction. *
The authors
Paul J. Di Stefano, CPA, CPCU, is the managing director and William E. Ryan, CPA, is an associate director of Harbor Capital Advisors, Inc., a national financial and management consulting firm that offers services to the insurance industry. Harbor Capital Advisors, Inc. can be reached at (800) 858-2732.