Many agency principals respond to the above question in an interesting manner. "If someone were to offer me a crazy price for my agency, certainly I am a seller." On the other hand, "If I can pay for an acquisition totally on a retention basis over a long period of time with no financial risk, of course, I am a buyer."
This unfortunately is a very naive approach to an issue as important as this. The chance that an acquirer will step up and offer you a deal too good to be true for your agency is about the same as getting hit by lightning. Yes, we have all heard of some legendary price paid by a bank for an agency. Are these stories true? The answer is yes, but such occasions are rare. There are deal situations where the principal of an agency is well known to the bank's management, perhaps even sits on the board of the bank where a high premium is paid for the agency to act as a platform for future acquisitions. The reality is that those future acquisitions are done at market multiples.
Certainly we at Harbor Capital have been involved in deals from time to time where an extremely attractive offer is made for one of our clients, where the fit between the two organizations is remarkable. Is it our expectation, as professionals, that we will have one bidder offering 50% or more than another for one of our clients? Again the answer is not usually--unless one of the bidders is a bottom fisher. There are certainly differences between offers, and certainly one of the deciding factors in accepting a transaction would be if one of our clients would receive 20% more in the purchase price from a specific buyer.
As the owner of an agency, you must be realistic with regard to the possibilities and probabilities associated with the marketplace when attempting to define a coherent strategy for your agency. In some cases, we have actually seen deals fall apart because one party or the other to the transaction decides to hold out for what he/she thinks will be a more lucrative offer down the line from another buyer. Unfortunately, in many instances that kind of decision is based upon a lack of knowledge of the realities of the marketplace.
The flip side of the selling transaction is the acquisition of other agencies. If your agency decides that your strategy should be one of acquisition, once again I would suggest that you first come to terms with the reality of the marketplace.
If your expectation is that you will be able to attract sellers with a deal which is totally favorable to a buyer, your organization is at risk of devoting time and energy to a process that is not likely to result in much success. In addition, your agency will risk losing the opportunity to make deals which could potentially make tremendous sense for your agency. Once a seller draws a negative conclusion regarding a buyer and his/her tactics, it usually proves an extremely difficult process to bring that seller back to the table. The potential seller typically remains disenchanted, unless the buyer now indicates a willingness to pay an above market price, which, of course, defeats the original financial objective of embarking on an acquisition campaign.
How does one determine how to approach the process of buying or selling? If buying is your strategy, you must put yourself in the position of the seller. If you were selling, what would you expect? You would expect that a buyer would be willing to put up a meaningful down payment. This down payment might range from a minimum 20% to 30% of the purchase price. You also would expect that you would be paid out over a reasonable period of time, typically three to five years. You also might expect a floor on the total payment to be made even when part of the purchase price might be paid on a retention basis.
If selling is your goal, first determine what your financial goals are and how long you would like to continue to work. You should certainly assess how vulnerable your book of business is to attrition if you are considering a retention deal. Determine what type of transition is necessary to minimize any loss of business, which will maximize your payout. In summary, know what to expect financially and avoid beginning conversations with unrealistic expectations.
In summary, whether buying or selling is your strategy, start the process off by realistically assessing how the marketplace is valuing agencies. Remember buying is the other side of the coin from selling. Keep in mind the goals of the other party as well as your own. If you are responding to solicitation because you think you may have stumbled upon that buyer willing to pay that "crazy price," take a deep breath and reconsider the investment of time and energy you are about to make.
Using a financial advisor is always recommended. We live the deal process and can advise you so that you avoid the pitfalls inherent in making some of the potentially largest transactions in your life. An intermediary such as Harbor Capital Advisors can guide you through the process of weighing future strategic options without your trying to reinvent the wheel.
The authors
Paul J. Di Stefano, CPA, CPCU, is the managing director of Harbor Capital Advisors, Inc., a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger & acquisition representation, strategic and management consulting. William E. Ryan, CPA, is an associate director for Harbor Capital and was previously head of finance for an insurance agency consolidator. Bill has almost 20 years of experience in valuing agencies and managing agency acquisitions. New-York-based Harbor Capital can be reached at (800) 858-2732.
©COPYRIGHT: The Rough Notes Magazine, 2000