AGENCY FINANCIAL MANAGEMENT
Positioning for opportunities in 2002
By Paul J. Di Stefano, CPA, CPCU
If one were considering the idea of selling to a larger organization, 2002 could prove to be a unique time to consider it.
Two axioms that may be relevant to this topic are "timing is everything" and "success is achieved when opportunity meets preparedness." From a timing standpoint Harbor Capital's work with financial institutions and national brokers would indicate that merger and acquisition opportunities in 2002 will be comparable to the level of opportunities available in 2001. With that in mind, agency principals who are reviewing their strategic options should be able to answer two questions: (1) Will your agency become aware of these new opportunities and (2) will you be prepared to take advantage of those opportunities as they arise.
If one were considering the idea of selling to a larger organization, 2002 could prove to be a unique time to consider it. The reasons for the continuing high level of activity are fairly obvious. National brokerage organizations are benefiting from high market multiples and therefore are able to offer attractive financial terms to acquisition targets. These firms look at acquisitions not only as a way to grow but also as a way to bring new blood to their organizations. On the other hand, financial institutions continue to strive to achieve critical mass and perfect their insurance models.
From a seller's perspective, the reality is that the hardening market has brought some negatives. We are all familiar with the saying, "Be careful what you wish for, you may get it." Although carriers are increasing prices--in many cases dramatically--it is becoming more and more difficult for agents to place certain risks. At the same time, carriers are also taking this opportunity to reduce agents' commissions. In summary, agents are doing a lot more work and only reaping part of the financial rewards since, in most cases, as independent agencies they lack the leverage of the larger organizations. The silver lining in that cloud is that acquirers do have leverage with carriers and expect to fully benefit from rising premiums which they anticipate will continue into the near future. That positive pricing expectation is being built into acquisition offers made for agencies.
Discussions with some of the agents who are likely to be acquisition targets in 2002 reveal that their initial reaction was to sit tight and wait until they were approached. These agents believed that they would be targeted either because they may have a high recognition profile in their geographic area or because they dominate in their specialty line of business. They were under the assumption that they would be sought out by prospective buyers and would only have to wait for a lucrative offer. Life should be that easy. The reality is that buyers are routinely contacting potential targets looking for opportunities.
Consideration must also be given to the fact that within large organizations a political dynamic takes place regarding the dynamics of acquisition decisions. A portion of those dynamics lies with the individual responsible for the relevant region affected by the discussions. That individual typically is responsible for weeding through opportunities and invariably must be an advocate for the deal. Beyond that, the acquirer's financial staff becomes involved in the process of evaluating the opportunity from a pricing perspective. Information gathered and preliminary recommendations are then typically reviewed by an acquisition committee, which makes a decision as to pricing
and structure.
Part of the financial consideration in transactions is tax consequences. Is the transaction a sale of stock or sale of assets? In the case of an assets sale, what other obligations are being assumed by the buyer? In the case of an agency that is a C corporation, typically the transaction is a stock sale. If in the past the corporation has been subject to litigation or questionable internal dealings, the buyer may be reluctant to acquire stock. This could be a deal-killer from a seller's tax standpoint, unless a viable alternative structure is found.
In addition to the structure, other details of that transaction must be considered. What is the nature of employment contacts? What provisions will be contained in the representations and warranties surrounding the deal? What about non-owned books of business within the agency? What are terms of the non-solicitation and non-competes for producers? How will the agency's tangible assets be dealt with? What will be the revenue cut-off dates in an assets sale for the buyer and seller? In general, with regard to all these matters what is reasonable and customary?
The dynamics of dealing with one buyer are multiplied when dealing with a number of suitors. When selling, agency principals should talk to as many interested buyers as possible for several reasons. The first is that in order to make the best decision, one must know what opportunities are available. While one can make a decision by considering a single opportunity, that decision would effectively have no point of reference. Market value is ultimately determined by the dynamics of the marketplace, not opinion.
What seems on the surface to be a simple process is potentially fraught with difficulty. Agency principals must be able to manage the process through the acquirer's organization as well as internally within the selling or merging organization. If you as an agency principal recognize the complexity of the process, the first step is take control of the process and its dynamics.
Larger organizations recognize the value of having an intermediary manage the deal process and as such, Harbor Capital Advisors has been routinely retained by these organizations to approach targeted agencies on their behalf. They recognize that the potetial target needs to have professional counsel if a transaction is to be successfully completed. That counsel relates to all of the potential issues covered in the previous discussion.
In summary, when opportunity knocks, one should be prepared to respond appropriately. A proactive approach is the way to go once it has been determined that agency principals want to entertain opportunities. The principals should treat a possible sale as a complex project, which must be managed accordingly. Professional representation in this process should be seriously considered since there is much at stake when it comes to selling the largest asset that many agency principals own. *
The author
Paul J. Di Stefano, CPA, CPCU, is the managing director of Harbor Capital Advisors, Inc., a national financial and management consulting firm that offers services to the insurance industry. Services include agency appraisals, merger & acquisition representation, strategic and management consulting.
Harbor Capital Advisors, Inc., can be reached in New York at (800) 858-2732 and through its Web site (www.harborcapitaladvisors.com).