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The Rough Notes Company Inc.



September 23
09:14 2019

Agency Financial Management

By Rick Dennen


It’s a seller’s market, but strategic buyers can make good deals

Growth is always on the mind of driven insurance professionals. And a growing insurance business usually means growing revenue. Deliberately planned acquisitions typically offer the most efficient way to grow income quickly. In addition, acquisitions often provide a strategic way for owners to take their businesses to the next level. All of that said, we are currently in a seller’s market, which makes it a very expensive time to buy. Should you choose, however, to embark on making an acquisition, here are some things to keep in mind:

Strong market. The merger and acquisition (M&A) environment has been extremely active, and there’s a good chance that the trend will continue. According to Optis Partners, 2018 M&A activity totaled 665 transactions, eclipsing the previous record of 611 in 2017. There were 328 M&As in the first half of 2019, compared with 300 in the same period last year. Again, all of this activity can drive up the price of an acquisition.

Aging business owners. The Baby Boom generation is well on the road to retirement with the first Boomers already qualifying for Social Security benefits. According to a report from McKinsey, the average age of an insurance professional in the Unites States is 59, meaning one quarter of the insurance industry’s workforce will be able to retire in the near future. What’s more, not all Boomers are content to keep working until health issues stop them. Many are retiring early to pursue hobbies or to take on roles they find to be more satisfying.

If there’s a single secret to a successful acquisition, it’s exhaustive due diligence.

Your team is hungry. People like to be challenged and to succeed. An acquisition can take employees out of their daily routines and inspire them to do more. That can be especially true if you link incentives to the acquisition.

What’s the right opportunity?

Before your search begins, give some thought to what you envision as an ideal acquisition. What size business do you want, in terms of both revenue and staffing? Does it need to fit within a certain geographic area or provide a new product offering you can cross-sell to your existing clients and vice versa? Would you want the seller to stay on your payroll in a consultative role? Do you prefer a profitable business that’s generating excellent revenue, or are you willing to pay less for a struggling operation that needs new investment, better management, and a fresh strategy?

Seek expertise. Successful businesspeople usually become that way because they know how to tap into knowledge and advice from a variety of experts. That’s especially important when it comes to acquisitions. Build a team of experts you trust. Include your accountant, lawyer, financial advisor, and, most important, an investment banker. Keep them involved throughout the entire process as they will provide viewpoints and identify issues you may not have considered or unearthed on your own.

Perform due diligence. If there’s a single secret to a successful acquisition, it’s exhaustive due diligence. The more you know about the business you plan to acquire, the better you’ll be able to integrate it into your existing business and the more closely the purchase price will reflect the true value. Failing to perform adequate due diligence is a key reason why many acquisitions sour, so protect your financial interests and professional reputation by answering these questions:

  • How do they do business? Few businesses will volunteer every bit of information you need, especially the negative aspects. Check business references and perform online research to turn up any irregularities.
  • Why are they selling? What doesthe seller plan to do after the acquisi-tion closes? There are many legitimatereasons for putting a business on the market, such as retirement or succes-sion planning, but some sellers may be trying to dodge financial or legal issues. Do your homework. You don’t want to discover significant financial problems or legal liabilities after the deal is done.
  • How are the numbers? Don’t settle for pro forma financials. Have your accountant compare actual tax returns, compute ratios and margins, and examine the level of non-operating expenses. Watch for nonrecurring items that might artificially inflate income levels.
  • Are you compatible? Don’t neglect the intangible aspects of the transaction. Do you do business in ways that are similar to the current owner’s style? Do you have a similar client-service philosophy? Are the company cultures compatible? Will the employees prosper with your management style, or will you butt heads? Since the answers are seldom quantifiable, you may have to rely on your gut instincts.

Find the value

Real estate agents are ecstatic when prospective customers fall in love with a particular house because they know they’ll be able to get a higher price for it. The same can hold true for the price of a business if you let your emotions drive the process. The seller is excited at the prospect of a large influx of cash, while you’re excited about the opportunity to grow.

Unfortunately, buyers often underestimate the cost of purchasing and the cost of doing business in a now-larger company. They don’t plan for contingencies or the unexpected. They also may underestimate their ability to reduce costs. Here again, an accurate valuation is critical.

The critical transition

The work doesn’t end once the papershave been signed. The transition betweenowners is full of make-or-break moments involving clients and employees. Even though your business and the business you’ve purchased are both established, in effect you’re creating a whole new set of first impressions.

Internally, employees want to know that their jobs are secure and they’re not facing significant changes in their work environment. Frequent, relevant communication is key to staying in front of disruptions in work.

The more time you devote to gettingto know your new employees and involving them in your plans, the less uncertainty they’ll face. That’s important because their moods and words will have a significant effect on what their customers think of you, the new owner.

Externally, clients want to be assured that their relationship with your business will not suffer any disruptions and that the acquisition won’t create any hassles for them. Focus on get-ting to know the clients of the acquired firm and reassuring them that they won’t notice any bumps along the way.

If you’re combining office staffs, give everyone a chance to get to know each other outside of the work environment. Simple, informal events such as cookouts and potluck dinners can provide the opportunity for comfortable conversations. Also, give employees time to visit each other’s offices and take time to highlight the services and practices—customer service, retention, sales, and so on—that are outstanding in each firm.

Financing options

Once you have carefully assessed the available options and the associated costs of acquiring an insurance business, it is time to ascertain whether you have the funds on hand to move forward with the purchase. If you do not, rather than turning to a traditional lender that requires tangible assets such as inventory, equipment, and real estate, consider working with a specialty lender. Specialty lenders, like Oak Street Funding®, are accustomed to working within the confines of the insurance industry and can use intangible assets, like future cash flows, to provide an injection of capital to support your acquisition growth objectives.

The author

Rick Dennen is the founder, president and chief executive officer of Oak Street Funding, a specialty lending company that provides commission-based lending for insurance businesses. Since he founded Oak Street in 2003, under Dennen’s leadership the business has experienced exponential growth and has a portfolio that exceeds $1 billion. Dennen is a licensed agent for life, accident and health products in Indiana and holds one or more of these licenses in 45 other states. In addition, he holds an MBA in finance and is an instructor of venture capital and entrepreneurialfinance at the Indiana University KelleySchool of Business. Email Rick at

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