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We are already seeing private equity firms and agencies in many markets pursuing aggressive growth by buying smaller independent agencies in nearby areas.

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency Financial Management

The new era of acquisitions

You have four ways to respond—which will you choose?

By Rick Dennen


It's happening all around you although you may not have noticed it yet. The community bank down the street that shared your town's name is now part of a "family" under an invented name that suggests success. The heating and cooling company that operated a couple of white vans now has a fleet of trucks, wrapped in colorful graphics with a clever name and catchy phone number. The neighborhood drug store has been replaced by a pair of chains that are challenging each other from opposite street corners.

In one industry after another, well-respected local providers are being replaced by regional and national giants. Often these huge companies have found a formula for success and can grow by duplicating it in one community after another. Their size and resources make them formidable competitors.

They may not have edged into your business yet. But you can be sure they are coming, and it's not a matter of "if" you'll face them. It's a matter of "when." We are already seeing private equity firms and agencies in many markets pursuing aggressive growth by buying smaller independent agencies in nearby areas.

Why big agencies can afford to be aggressive

Agencies whose owners are eager to grow and gain access to capital know that acquisitions can give them the opportunity for rapid expansion, significant economies of scale, competitive advantages, less vulnerability to market swings, and even greater access to capital. Let's look at each of these factors.

Rapid expansion. Buying an existing agency and its book of business provides an instant presence in another community, as opposed to opening a brand-new office and having to wait for the normal growth process. Experienced producers usually are part of the deal, and the buyer can capitalize on the seller's hard-earned reputation.


Economies of scale. Every business has certain operating costs. Multiple acquisitions allow the buyer to centralize administrative costs and eliminate duplication, particularly through the use of technology. The combined company needs just one computer system, one CPA, one attorney, and perhaps only one bank.

Competitive advantages. The combined book of business, geographic footprint and commission levels are much larger than a single agency can typically achieve. These factors make the acquiring agency more attractive to carriers. The resources and marketing strength these larger agencies command make it difficult for smaller agencies to compete effectively with them.

Reduced vulnerability. Even the most successful agency is significantly affected by the local economy. A plant closing or economic uncertainty can lead clients to scale back on coverages or even cause them to leave the community permanently. Simultaneously doing business in several geographic areas can blunt the impact of issues in any one area.

Access to capital. The larger scale associated with blending multiple agencies into a single business increases the acquiring agency's bottom line and overall enterprise value. In addition to making the agency more attractive to traditional lending sources and thereby better qualified for more attractive rates, large scale may provide access to other needed capital such as mezzanine financing or equity funding.

Where that leaves independent agencies

Again, you may not have seen local evidence of this acquisition trend, but it's safe to say you will. Pretending it won't happen isn't a viable solution. All that will do is guarantee that when those larger competitors show up, they'll be able to squeeze you out of the marketplace.

Unless you simply want to throw your hands in the air and give up, you have four choices. You can build up your agency to make it a stronger competitor; you can make your agency more attractive (and more valuable) to a prospective acquirer; you can align yourself with similarly situated agencies; or you can take the offensive and become an acquirer.

Fortify your defenses. Never let up when it comes to generating new business, improving your operations and cross-selling existing clients. Invest in your staff so they keep clients happy. Maintain a strong presence in the marketplace to protect your reputation.

Make yourself attractive. Interestingly, many of the steps you'd take to preserve your independence also make you more valuable in the eyes of a buyer. Today most acquiring agencies focus on several factors. First, they want to buy a healthy, growing organization rather than a business that has already passed its peak. A sustained growth trend and evidence of providing real solutions to clients (instead of simply writing policies) are highly attractive. Also appealing are a strong management team, low employee turnover and healthy profit margins. In addition, most acquirers tend to prefer sellers who are in their mid-50s or younger because they're more likely than older sellers to continue working to grow the business.

Find strength in numbers. Some agency owners find many of the advantages that are available to larger agencies by joining an agency network. Member agencies gain access to additional carriers, more attractive commission schedules, administrative and marketing support, and growth-oriented best practices. No two networks are alike, so choose carefully to make sure the network fits your personality and will strengthen, rather than endanger, your business.

Become an acquirer. If your goal is to stay in business for a long time, or to build up the value of your agency so it will fund a far-off retirement, you may want to transform your agency into one of those aggressive acquirers. That's particularly true if you have a solid balance sheet and strong profit performance, and have achieved extraordinary success in obtaining new clients and growing business from existing insureds. Applying your methods to someone else's book of business offers opportunities for significant revenue growth.

Make the right choice for you

No single approach is right for every agency owner. The key is to choose the one that's consistent with and focused on your long-term goals. By knowing where you want to be and identifying the strategy that will get you there, you'll achieve a degree of control over your own destiny. If you simply sit back and take your chances, the outcome isn't likely to be as good.

The author

Rick Dennen is president and CEO of Oak Street Funding, which provides commission-based lending to agency owners who need capital to buy, build or sell their agency. Dennen holds an MBA in finance and is an instructor of venture capital and entrepreneurial finance at the Indiana University Kelley School of Business. He can be reached at rick.dennen@oakstreetfunding.com.

   

 

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