To acquire or be acquired–that is the question

Independent retail insurance agencies looking to grow through acquisition had better have a good plan in place if they want to run with the big dogs–those big dogs being the banks, the large public brokers and the regional clusters whose growth strategies pretty much boil down to this: seek out and woo smaller agencies in order to achieve targeted growth goals.

The big dogs are out there, they have money and they have a plan. That was the message conveyed by Paul Vredenburg of Marsh, Berry & Co. of Concord, Ohio, speaking at the Independent Insurance Agents of Texas’ Joe Vincent Management Seminar.

Presenting “Acquisition Strategies for Small Agencies,” Vredenburg said no matter what kind of market one is looking at–small or large, urban or rural–competition for desirable, and acquirable, agencies exists. However, all is not lost for the small player that has their act together, is loaded with lots of self-knowledge, and has a goal and a plan to achieve it.

Vredenburg said compared to the years preceding it, 2005 saw a downturn in the number of merger and acquisition transactions. There was a smaller number of acquisitions by public brokers, banks and other entities and a decline in the number of sellers.

Because there are fewer available agencies in the marketplace, valuations are remaining high. “2005 multiples went up over 2004 multiples,” Vredenburg said. “A lot of people said 2003 multiples were too high and would never be sustainable … but in 2004 and 2005 they went up again.”

Vredenburg said for agencies that are looking to find a partner, it is now a seller’s market and there are “a ton of options out there.” Buyers, therefore, must differentiate themselves from their competitors. “You can’t just differentiate yourself on price … what you want to do is focus on the other factors that you can bring to the acquisition,” he said.

He noted that in counseling agencies that want to merge or be acquired he’s found the number one response to the question: What’s most important to you in this transaction? is culture. “The number one thing is culture, after that they say they want to retain their employees; the third thing is ‘I want to make sure my standing in the community is maintained;’ and they keep going down the list and then money pops up. … Money is probably five or six down on the list.

“Are they being honest with me? They might be a little dishonest on the rank, but culture, keeping the employees, continuity and keeping their respect in the community” are what they say matters most.

But, he continued, when you go into a meeting with potential buyers and start talking about a possible deal, money starts creeping to the top of the list.

As a buyer without a pot of gold to rely upon, the trick is to keep the focus on the agency’s culture and continuity, on its employees and personality. The reason you want to do this, Vredenburg said, is the people who have the money to buy, what he calls “serial buyers,” such as the banks and the public brokers, have a process in place. A core line of their business is acquisitions. “They’ve got people dedicated to it, who ‘bird dog’ agencies. Everybody here knows the bird dogs at the large brokers–their job is to go around the country and have breakfast with you. They say ‘when it’s time for you to consider, consider us, we have a great operation.’ …They have attorneys on staff. They have speed … they can do [the acquisition] in 30 days, 60 days, 90 days.”

Position yourself as a good buyer
“Don’t sell on price, sell on services … sell on the services you bring to the table,” Vredenburg said.

Have an answer for questions like: Do you know what the different components of your business are and how you run them?

“If you really want to do this, you need to sit down with it and say, ‘Acquisition is going to be a core piece of my business.’… You want to be proactive, you don’t want to be reactive,” he said. Management must be committed to the acquisition and spend the time and dedicate resources to acquiring. If not, he said, “What’s going to happen is someone’s going to call you and say, ‘Hey I’m thinking about selling, are you interested?’ … But you have other responsibilities and you lose track and you’re behind the eight-ball, you’re behind everybody else they’re talking to. And if you think they’re not talking to anybody else, you’re kidding yourself.”

Questions potential acquirers need to ask themselves are: Do you know who you are? What is your business strategy and how do you tell someone about it? How do you define it to someone else? What is your culture? Why do you want to acquire?

You may want to acquire because you want to add new markets, or talent, or enhanced profitability and you’re looking for a company that you can roll in and perhaps “make 50 or 60 percent margins on that business. … But you want to be able to express that target,” Vredenburg said. He added that lot of agencies say they want to grow 15 percent per year but may not have a plan to achieve their growth goals. They need to know how they are going to reach that goal and whether it’s going to be organic growth or achieved through acquisitions.

Additionally, if you have the idea that you’re going to roll in the new company and let go of half its staff, but they’re saying they want to keep everyone they have in place and the systems they have in place, it’s not going to work, he said. Those ideas have to be laid out early so everyone knows what’s expected.

An agency looking to acquire also needs to make an assessment of its capital arrangements, of its balance sheet and its available cash. Vredenburg said there are ways to minimize the necessary down payment, but almost everybody is going to want some cash up front. “Very few people will want to join you and not get some cash out of the deal,” he said.

Put together a sales pitch; know what your plusses are and how to communicate that. Be able to explain how their joining your organization is going to affect theirs in terms of management, back office systems, personnel, benefits and organizational control.

“Know your competition,” he added. “People are out there talking to other people–the other people out there will be the banks, the public brokers. People always say, “nobody wants to go into these small towns and buy these small books of business. It’s not true. No matter where you’re looking, there will be competition, know who they are and know what they bring to the table.”