Preventing acquisition remorse
Doing your homework ahead of time can make M&As go much smoother
By Rick Dennen
There are few things worse than making an expensive purchase that leaves you feeling dissatisfied on any level. Small expenditures risk little, so nothing ventured/nothing gained/nothing lost. But when you invest tens, thousands, or hundreds of thousands of dollars in a business, you want and need to get your money's worth.
Dissatisfaction, unfortunately, is the result of most mergers and acquisitions. Up to 70% to 90% of M&As fail to live up to the expectations of both buyers and sellers (Harvard Business Review). Based on our experience financing and servicing more than a thousand M&A loans, the blame can be squarely placed on the lack of thorough research and proper due diligence prior to closing deals.
If you're planning to make an asset or stock purchase, take note of these tips to avoid buyer's remorse.
Know the real motives. Don't assume sellers are completely transparent about why they are selling their agency. While they may give you some of the reasons for exiting, they may try to downplay or hide real issues regarding carrier changes, staffing, sales or finances that could lower the agency's value and marketability. Worse, they can secretly be planning to continue to sell insurance for a competing agency and take clients with them. To uncover the truth, be bold and direct, ask tough questions and validate information with outside parties. You can't be assured of success without accurate facts.
Have a true picture of agency operations. Getting a general idea of how the agency operates will provide a high-level view, but that's not enough. Without spending time observing key functions and processes, you might be surprised by how the agency actually functions after you've acquired it. Buyers should visit all of the agency's locations several times and note details about customer service, accounting systems, carriers, agency information systems, and more. Consider stopping by unannounced to see what's really going on.
Gauge who can make or break the agency. There can be significant differences between what employees look like on paper and how they actually handle their job responsibilities. Don't rely on short introductions, job descriptions and organizational charts to gauge the human capital of the agency. To understand each employee's strengths, weaknesses and job responsibilities, you need to take time to talk with employees and observe them doing their jobs. Learn about their job history, too, because they may have other untapped skills and experiences that can benefit the agency. It's also important to gauge how employees feel about a potential sale based on what they've heard and understand, especially agents with rights to future commissions.
Accurately estimate needed capital. Too often, buyers find themselves low on cash flow within months of acquiring an agency business. Sometimes they underestimate how much cash is needed to continue operations and other times they miss a nonrecurring cash item in the due diligence process. Once you decide to make a purchase, map out a transition plan for those first few months when things may not be normal. For example, the oversight of existing contract details can lead to a shortfall and throw off future projections. This is often the case when buyers fail to realize that Purchase and Sale Agreements can allow sellers to receive all commissions earned up to the time of sale and even beyond. Buyers may also neglect to negotiate some vested interest with the selling party. It is critical that the seller stay engaged and financially aligned long enough to make a smooth transition without loss of any agency revenue.
Build relationships early. As early as possible, review a customer list with details about the products they purchase, revenue, producer, and length of time with the agency. Take it a step further and meet with some key customers to uncover their feelings about the agency. It may even be ideal to go on sales calls with current agents to understand the dynamics of the agency's customer relationships. Last, you should always do some basic research online to get a feel for public opinion about the agency. Blogs, rating Web sites, directories, and social sites can reveal issues customers might not feel comfortable sharing with you.
Know what customers want. You acquire an agency to acquire customers. So it's critical to develop a transition plan that will maintain those customers and keep them happy. If you've done your homework and truly understand what it will take to keep customers, crafting a plan shouldn't be difficult. A good plan will allow plenty of time to introduce new owners to customers and address any questions or concerns they might have. It will communicate the agency's value of and appreciation for customers and express a strong desire to meet their needs.
Dig deeply. Because insurance agency owners are typically sales people who own a business vs. business owners who sell insurance, they tend to rely on commission statements—or worse, a broker's discretionary cash flow statements—to get a picture of the agency's financial viability. But a complete and thorough review of all financial aspects of the agency is essential. It's advisable to have an accountant assist with this process. Buyers should analyze audited financials and tax returns for at least the past three years, along with budgets (actual vs. budget), contracts, commission statements and retention reports to identify trends.
Read the fine print. The importance of a thorough review of all contracts cannot be overestimated and may require the attention of attorneys. All employee-related contracts, including non-compete and non-solicitation agreements, should be evaluated to determine if they will remain enforceable or if new ones will be required. Buyers should communicate with each carrier to make sure contracts and rates will remain the same or can be merged with existing contracts for the same or better rates. And as part of the financial examination, leases, vendor relationships and agreements, and all other contracts need a detailed analysis.
Rick Dennen is president and CEO of Oak Street Funding, which provides commission-based lending for insurance agents that need capital to buy, build or sell their agency. Dennen is a licensed agent in the State of Indiana for life, accident & health products and a licensed certified public a ccountant in the State of Indiana. In addition, he is an instructor of venture capital and entrepreneurial finance at the Indiana University Kelly School of Business. He can be reached at firstname.lastname@example.org.