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Agency Financial Management MANAGING ACQUISITION DISCUSSIONS The “courtship” process is a delicate proposition By Paul J. Di Stefano, CPA, CPCU
Acquirers are often disappointed when agency principals whom they are courting in the end decide to sell to another suitor. Prospective buyers should be realistic about the dynamics of the divestiture process. The fact is that, once agency principals have made the decision to sell, they often are exploring multiple opportunities. Indeed, in many cases the initial decision to explore a sale may have well been prompted by discussions initiated by that disappointed acquirer. When Harbor Capital is retained to represent the seller, we always approach multiple qualified buyers on behalf of our client. Although it seems this process might lessen the probability that any one suitor will be successful, the ultimate motivation of a seller to “pull the trigger” is actually enhanced by his or her exposure to viable options. We like to describe the process of interviewing buyers as an educational process. During the exploration of alternatives, the natural “fit” for the seller will become obvious. The “fit” is based on a number of factors, including the culture and business model of the acquirers. Culture can be defined in many ways, but we like to think of it as the way an agency conducts its business. In cases where the seller is planning to play an active role with the acquirer’s organization, he or she is likely to be particularly concerned about the culture and reputation of the organization that he or she is about to join. Potential buyers should realize that in some cases the seller may have a less than positive perception of the buyer’s organization. We routinely advise our clients to keep an open mind because that perception may be based on nothing more than a competitor’s unjustified negative comments. At Harbor Capital, we have the advantage of being on the inside of the acquisition process as it unfolds. Over time, we have observed the varied approaches taken by acquirers in presenting their organizations as prospective acquirers as well as our clients’ reaction to those presentations. One mistake many acquirers make is that they focus too strongly on the potential business risks to themselves. Other buyers take a broader approach, focusing on the benefits to both agencies. This is the classic “glass is half full or half empty” scenario. When the potential acquirer dwells on the negative aspects, the hidden agenda may be the acquirer’s desire to structure the deal totally on a contingent basis. Conversations are likely to be short lived if the seller tries to use this approach as a negotiation tactic. Understandably, potential acquirers focus most of their efforts on courting the principals of the agency they are considering acquiring. Although this is a critical part of the process, buyers should also make these principals aware of the opportunities available to key members of the seller’s team. Even in cases where the agency principals are looking to retire, those key individuals will be important to the perpetuation of the selling agency’s book of business. It is our experience that these individuals can get quite nervous about their future in an acquisition, so efforts to allay those fears represent time well spent. Four suitors, four approaches A recent transaction we handled highlighted the various approaches taken by prospective buyers. Our client, a personal lines operation, was being courted by four organizations, each with a different business model. One of the potential buyers (Acquirer Number One) was interested in the acquisition as a platform to help roll out an affinity group program in an adjoining geographical area. The buyer was convinced that our client’s book of business could be increased dramatically with the addition of this program. The upside potential was particularly attractive for our client because two of the agency’s principals desired to remain with the business as producers. The fly in the ointment was that the buyer wanted to centralize account processing off site. This would have required the termination of a number of our client’s existing staff, which our client preferred not to do. The principals of Acquirer Number Two had completed several acquisitions in the past and treated the process simply as a matter of mechanics. This buyer focused conversations on personnel and their compensation packages as well as market relationships, with little consideration of cultural fit. This organization’s offer was quite competitive, but its lack of a clear vision of the cultural aspect was problematic to our client. Acquirer Number Three was amenable to keeping the office in place and not rolling the business into its nearby operations. Although our client saw a good fit culturally with this acquirer, the offer was quite conservative and not competitive. This potential acquirer was interested in doing the deal but was not as motivated as the other suitors. Acquirer Number Four was in a growth mode and envisioned a geographic expansion into our client’s area. This acquirer also focused on the opportunity for our client to offer commercial lines through the acquirer’s markets, as well as the addition of a new commercial program for a specific industry concentrated in the area. This opportunity was exciting to our client because it combined the best elements of the other proposals, including the opportunity to keep the existing staff in place. The acquirer had presented a vision that the selling principals found intriguing. Interestingly, all of the acquirers offered attractive growth opportunities, but our client chose the acquirer that defined the opportunity most completely and was sensitive to the expressed desires of the selling principals while at the same time presenting a very competitive offer. We have had other experiences that reflect the importance of the acquirer’s approach. In a recent deal in the Midwest, our client was being courted by multiple buyers. Early in the initial discussion, one acquirer seemed to have a leg up based on strategic fit. In this case, although we believed that another suitor had an equally good fit, our client perceived that the cultures of the two organizations were too different. In these discussions, the “dark horse” prevailed when after a number of meetings it was able to paint a detailed picture of the strategic fit. In another transaction, our client had offers from several national brokers but in the end sold to a regional agency that was able to offer a similar financial package through a combination of bank financing and insurance company guarantees. The decision to go with the regional broker was based on the comfort level of the younger group of minority shareholders who would remain active players with the acquirer. In summary, buyers should spend some time developing their approaches to acquisition discussions. Initial discussions are an opportunity to present a picture to the seller of what the future would be like with that organization. Aside from the financial considerations, the seller’s reaction to the buyer’s presentations is a critical factor in determining which acquirer a seller will gravitate to. Convincing a target that the buyer’s organization represents the optimal fit for the seller’s agency is where the rubber hits the road. If there is indeed a natural fit between the agencies, the potential buyer will do himself a favor by focusing on that fit as well as the similarities in culture. * The author |
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