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Agency Financial Management Overcoming barriers to a fruitful deal Three transactions that worked after sellers became more open-minded By Paul J. Di Stefano, CPA, CPCU With increasing frequency we observe agency principals attempting to make strategic decisions based on limited or faulty assumptions about the merger and acquisition marketplace. We have concluded that the main reason for successful principals proceeding in this uncharacteristic manner is the belief that their circumstances are somewhat unique. Instead of turning to professionals for advice, as they would with tax or legal questions, many principals attempt to make strategic decisions with a lack of experience. The following examples should shed some light on what leads some agency principals to believe that the issues they are dealing with have not been encountered previously by other agency owners. An agency principal, who subsequently became a client, contacted Harbor Capital after seeing a formal announcement of one of our closed transactions. He was somewhat surprised to learn that that our client had sold since he knew the principal of the agency fairly well and was of the opinion that the principal was a long way from the point of considering an exit. I explained to this prospective client that his casual observation had been on target, but that our client’s perspective had changed after a health scare. This new client noted that he, too, would love to sell out because he had other business interests that he wanted to pursue. He was, however, concerned that his agency was actually too profitable, generating extremely high margins for a retail agency and that he would not be able to realize an adequate purchase price to justify giving up his current cash flow. The strategy that the owner of this agency had come up with, prior to engaging Harbor Capital, involved approaching a local bank which he felt would be the most aggressive buyer. As part of that strategy, he had determined a price that would enable him to sell the agency and would present the deal to the bank in order to get a quick yes or no answer to his proposal. We advised him that the reality was two-fold: First, the bank would never react that quickly and would probably want to do due diligence prior to making that kind of offer; and, second, the deal that he was asking for would actually leave a lot of money on the table. The scenario that most likely would play out would be that months would go by before our client would know if he had a viable offer, and during that period he would be investing a substantial amount of time and effort in the process of developing information for the bank. The risk would be that without alternative buyers, he might find himself at the end of an extended period with no deal. Once we started working with this client, we realized that the agency’s high margins were, in fact, quite sustainable and we were able to assure him that the price he was demanding might actually be on the low side and that we were very confident that we would be able to come up with several buyers that would meet or exceed his expectations guaranteeing that a deal would close. The issue that got this client stuck was how a high-margin agency gets valued. He was under the impression that the value was likely to be capped at a point when he would be better off financially to continue operating the agency. We were able to give him examples of how the appropriate structure would generate full value. A second buy/sell situation revolved around a client who had discussions with a buyer who had approached the agency. This client was quite annoyed that the prospective buyer had not followed up. Having shared financial and other information with the buyer, without a confidentiality letter, the agency principals had considered asking that the information be returned. Our first concern was whether or not our client had determined that selling was the appropriate strategy or was enamored with the fact that his agency was being pursued. After we established the fact that he did indeed want to sell, our advice was that the agency principals embark on an orderly divestiture process. We advised our client that requesting the return of the information would prove counter-productive and could alienate a potential buyer. We did suggest that they indicate to the buyer that they had retained a financial intermediary to help them in the process. This action would give us the necessary time to understand our client’s operation and to suggest a comprehensive list of other potential acquirers. While buyers bristle at the idea of being part of an auction, it benefits sellers to explore varying opportu-nities. Unfortunately, some sellers get caught up in the conundrum of wanting to pursue other opportunities while not wanting to jeopardize current discussions. A third example centered on a client who thought he might run into problems selling because of the nature of the agency’s business. He was concerned as to how potential acquirers would view his agency in light of the fact that half his book of business involved municipalities. He was specifically concerned that his account relationships involved him personally and would raise a red flag to a buyer. His view was that the glass was half empty, not half full. The reality was that to an acquirer in the business, transitions were a much more routine matter than he envisioned. This situation was similar in nature to an agency with a specialty practice with a limited number of markets that are willing to write that specialty class of business. Typically the margins are high in these agencies since there is a lack of market competition. The general perception is that buyers are reluctant to put a premium on these agencies because of perceived market risk. The reality is that the right buyer will be the one that is already in that specialty and understands the risks. There is no substitute for experience in the deal-making process. Attempting to effectively reinvent the wheel in selling the agency is usually not a productive or effective strategy. Professional help can make the process a positive experience instead of one fraught with difficulty. * |
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