LOOK OUT, LANDMINES AHEAD

Finding guidance, protection, and the best possible outcome for a sale

Buyers often advise sellers to go unrepresented, as it allows the buyer to

stay in control of the process and keep competitive bids away from the seller.

By James Graham, CVA

The decision to sell an insurance agency is a deeply emotional and challenging one. It’s understandable for the seller to have strong feelings attached to the decision, considering the immense amount of hard work they’ve poured into building their business. Moreover, since a seller gets to sell their business only once, the stakes are high.

Unfortunately, in many cases, sellers allow their emotions to be manipulated by potential buyers whoare seasoned professionals in mergers and acquisitions (M&A). In contrast, the sellers themselves are often at best amateurs. This can lead to unfavorableoutcomes for the seller, which could have been avoided with proper guidance and support from experienced professionals.

Buyers often advise sellers to go unrepresented, as it allows the buyer to stay in control of the process and keep competitive bids away from the seller. Unfortunately, buyers may also leverage their relationship with the seller to sway them into deals that may not be the best possible outcome.

To dissuade the seller from hiring an advisor, a buyer may make various arguments. But for each, there’s a good counterargument. For instance:

• Cost savings: The buyer may suggest that the seller can save money by not hiring an advisor, as the advisor will charge fees for their services. Counterpoint: The buyer fails to mention that the discount on valuation and other economic deal terms will likely be in excess of advisor fees.
• Simplicity: The buyer may argue that the sale process will be simpler and faster without an advisor involved, and that the buyer will be able to handle the transaction smoothly. Counterpoint: Regardless of any potential simplicity, the seller will have an immense amount of work to do in order to complete the transaction, and they will have to rely on the buyers to help them, leading to the buyer being able to slant facts in their favor.
• Trust: The buyer may try to establish a sense of trust with the seller, suggesting that an advisor may not have the seller’s best interests at heart. Counterpoint: A good advisor scopes a contract to align interests to ensure that the buyer has the seller’s best interests at heart.
• Experience: The buyer may suggest that they have experience in buying businesses and that they will be able to guide the seller through the sale process without the need for an advisor. Counterpoint: Even though buyers are often experts, they hire advisors on both the buy and sell side. If a buyer suggests not hiring an advisor, ask them who they hired for their last transaction.

In addition to recognizing and addressing these arguments and their potential disadvantages for the seller, there are other landmines that sellers should avoid.

• Sellers should never provide financial statements to buyers without their advisor’s approval. Sending financial statements prior to engaging an advisor, or with the intention of not engaging an advisor, gives the buyer the ability to craft the narrative around the value of one’s business.
• The buyer knows all the potential value they can extract from acquiring a business and they are incentivized to pro forma a seller’s financials in a way that moves value from the sellers to buyers.
• Avoid having meetings with buyers with the express purpose of discussing a merger prior to engaging an advisor. A good advisor will prepare sellers and help them position their business in the most advantageous way.
• Going into meetings unadvised can result in a seller making statements that are detrimental to the value of their business.
• Never make statements to potential buyers about your financial goals related to a transaction without going through an advisor. Anchoring negotiations can lead to either scaring buyers off due to unrealistic expectations or allowing buyers to capitalize on a seller’s ignorance and get a deal cheaply.
• Until a seller signs the purchase agreement and the deal is closed it is never too late to engage an advisor. While signing a letter of intent with an exclusivity does prevent you from talking to other potential buyers, it does not prevent you from engaging advisors.

It’s important to note that no insurance broker would recommend that their clients try to purchase insurance without using a broker. The reasons are similar to the way a seller should hire a reputable advisor to assist them in the sale of their business.

A trusted advisor can provide invaluable guidance and protection and help the seller achieve the best possible outcome from a sale.

A seller gets only one chance to capitalize on the sale of their life’s work and it is important to do it right.

The author

James Graham joined MarshBerry in 2015 and is a vice president on MarshBerry’s Financial Advisory team in its Dana Point, California, office. His expertise includes merger and acquisition advisory, capital raising, business valuation, perpetuation and succession planning, and strategic planning. James provides his clients with customized financial and capital strategies to help them accomplish their goals. He also is a facilitator for MarshBerry’s Connect Network and actively publishes articles relevant to the insurance distribution marketplace.

Prior to joining MarshBerry, James was a senior consultant with Deloitte Consulting LLP.

James currently maintains the FINRA Securities Industry Essentials (SIE®) Exam in addition to the Series 62, 79 and 63 FINRA Registrations through MarshBerry Capital, LLC, the affiliated FINRA-registered broker-dealer of Marsh, Berry & Co., LLC. He earned a Bachelor of Science in Finance from Azusa Pacific University and a Master’s in Business Administration (MBA) from George Mason University. He is also a Certified Valuation Analyst (CVA). Contact him at James.Graham@MarshBerry.com or (949) 272-0351.

M&A MARKET UPDATE

As of March 31, there have been 98 announced insurance distribution merger and acquisition (M&A) transactions in the United States this year. This represents a 7% increase in total deals compared to this time in 2022, which ended Q1 with 91 transactions.

Private capital-backed buyers accounted for 73 (74.5%) of the 98 transactions through March, which is consistent with the proportion of announced transactions over the last five years. Total deals by these buyers in-crease at a compound annual growth rate (CAGR) of 26.9% since 2018.

Announced transactions by independent agencies have continued to decline since 2021. On average, 23.1% of deals were done by independent agencies from 2018-2021 compared to12.6% in 2022 and 12.2% to start 2023.

High valuations and availability of capital could be two of the main drivers for this section of buyer’s decline in deStrong deal activity from the marketplace’s most active acquirers has remained constant to begin 2023. Ten buyers accounted for 51% of all announced transactions observed, while the top three account for 21.4% of the 98 total transactions.

Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., LLC.28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 (440.354.3230).Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. Statistics are preliminary and may change in future publications. Please feel free to send any announcements to M&A@MarshBerry.com. Source: S&P Global Market Intelligence and other publicly available sources.