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Building Equity Value
Agency acquisition: The sales process approach
The discipline and focus used in successful selling
offer a blueprint for growing through acquisition
By Wayne Walkotten
Soft insurance pricing and a weak economy are creating significant challenges to the organic growth of independent agents and brokers. As a result, many agencies have added acquisitions to their strategic plan for future growth. At the same time, a shrinking pool of national broker and bank acquirers is creating an opportunity for well-managed and well-capitalized agencies to effectively join the hunt for acquisition targets.
Through a process similar to that followed by great producers every day, the CEO, COO, and CFO of independent agencies play the role of an agency’s acquisition team. Much as when a producer invests time and agency resources to acquire an account, the acquisition team invests time and agency capital to identify suitable acquisition targets and develop a relationship with their principals. Although many successful independent agencies have created a disciplined sales process, some lack an organized and disciplined approach to pursuing mergers or acquisitions.
Great producers succeed by adhering to a well-defined sales process and telling a compelling story that differentiates their agency from competing firms. These producers consistently hone their skills, master the art and science of effective communication, and are diligent in their pursuit of desirable business. Almost without exception, great producers are extremely methodical, from prospecting through relationship building, presentation, and closing the sale.
In much the same way, successful agency acquirers follow a defined process, as shown in the graphic below.
As the graphic illustrates, the critical steps in the acquisition process are identical to those in the selling process, except that the second step in the sales process is marketing the account to carriers whereas the second step in the acquisition process is establishing a value for the target agency.
Prospecting and relationship building
Relationship building is widely accepted as the first critical step in the sales process. New producers must be coached and held accountable for building relationships with prospects. In the same way, the agency’s management team should begin the acquisition process by building strong relationships with the principals of the target agency.
The larger local and regional independent agencies that make successful acquisitions on a regular basis begin years in advance to identify prospective targets and build relationships. Insurance company functions and trade association meetings offer excellent opportunities for networking and initiating a dialogue with potential targets that are in need of a perpetuation solution. Most agencies that sell to other local agencies choose acquirers with whom they have developed a relationship and who view the transaction as a long-term perpetuation plan for the acquired agency.
Valuation
Once a producer has won the trust of a prospect, the next step is to market the account and obtain proposals from appropriate carriers. This entails reviewing the prospect’s current policies, conducting fact-finding interviews, and submitting the risk to carriers. This critical process of developing the quote is most successful when it is thorough and detailed and involves open and honest dialogue with the prospect and the underwriters.
Likewise, establishing a valuation for a target agency involves collecting data under a confidentiality agreement and conducting straightforward conversations with the target’s ownership or management team. Effective acquirers carefully examine the target’s balance sheet, income statements, and cash flow position, and use this and other information to analyze the target’s strengths and weaknesses. Based on this analysis, they establish a fair valuation and structure an offer that should be attractive to the seller.
In an acquisition, as in the sales process, negotiation takes place after a proposal has been presented to the acquisition target. During these negotiations, the acquiring agency’s team may refine its offer to address important issues raised by the target agency’s principals. Once both parties have agreed on a price and terms sheet, due diligence begins in earnest.
Due diligence
In the case of an insurance sale, the producer documents the specific exposures to be insured and arranges for company loss control specialists to visit the prospect’s operations if appropriate. This is the point in the sales process when producers must ensure they are not committing an error or omission. It is time for one final review with the insured and agreement on the property schedule, the vehicle list, and the specific coverage needed for each exposure being insured. In the case of an acquisition, due diligence is the often overlooked critical component, as buyer and seller turn the documentation process over to their respective legal counsel, heave a sigh of relief, and go back to dealing with everything that accumulated on their desks while they were negotiating.
In the same way that a producer celebrates after getting an order but still needs to dot the I’s and cross the T’s, the acquisition team’s due diligence experts must shift into high gear. Whereas establishing the valuation of the target agency is like kicking the tires of a vehicle, due diligence is the essential step of looking under the hood for the crucial details that were not identified in the valuation process.
Consider these key issues that must be addressed in due diligence:
• Insurance Company Payables and Accounts Receivable—Thoroughly review both sides of the trust process by examining the collectibility of outstanding receivables and the reconciliation of amounts owed to insurance carriers.
• Insurance Company Results and Relationships—Trend in results, contingent income projections and sustainability of carrier relationships.
• Producer Ownership, Compensation, and Contracts—Does the agency own all accounts, or do producers have an ownership interest? How are producers compensated, and how will that change after closing? Do producers have non-piracy or non-solicitation agreements?
• Customer Relationships—Analyze the target agency’s largest accounts, focusing on their longevity, loss and claims history, and financial and management stability.
• Staffing and Processes—Examine the target agency’s staffing structure and position descriptions, the processes used to service customers, and its automation system and technological proficiency.
When conducting due diligence, the acquisition team should involve their financial and customer service people, who can conduct a knowledgeable review of these issues. In some situations, the team may want to bring in outside professionals for assistance.
After completing this detailed review and addressing any findings in the definitive agreements, it is time to close the transaction. It is the days, weeks, and months after closing that will determine the success of the relationship.
Stewardship
In these times of extremely competitive P-C pricing and economic challenges, it is easy to forget about life after the sale. To fulfill promises made to the prospect—who is now a client—the producer must quarterback the stewardship process, delivering the value-added services promised and expected by the new client.
In the case of an acquisition, stewardship begins with the integration process and the fulfillment of promises made to the target agency. In all areas—sales, marketing, customer service, carrier relationships, automation, human resources, accounting and finance—the successful integration of an acquired agency depends on everyone in both agencies working together in a spirit of cooperation and shared goals. Rather than allowing the employees of the acquired agency to feel like stepchildren, bring them into the day-to-day functions of the acquiring agency, integrating systems and carriers as well.
Can an agency acquire its way to increased profitability and value? The answer is “yes,” if the acquisition strategy is complemented with a high-performing operating model to achieve the desired growth in profit and value. If a prospect is pleased by the quality of the relationship after a sale, both the producer’s and agency’s retention will improve. Likewise, an acquisition that addresses the issues identified in due diligence and focuses on post-sale integration will become a valuable asset.
Summing up
As agencies plan for the future and seize the opportunity to both grow organically and accomplish complementary acquisitions, they must do so with forethought and prudence. A producer who indiscriminately chases prospects and quotes every possible account expends both his or her energy and that of the agency’s marketing staff and company underwriters.
To ensure a steady flow of quality new business, agency sales managers must instill discipline in the prospecting and quoting process. Likewise, a tremendous amount of time can be invested in an acquisition, followed by a substantial capital investment. Like sales managers, an agency’s CEO, COO, and CFO must develop a disciplined process to identify and acquire desirable target agencies, integrate their operations, and maintain their financial and reputational integrity.
The author
Wayne Walkotten is a senior vice president at MarshBerry. He can be reached at (616) 723-8372 or at Wayne@MarshBerry.com.
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