Advice for independent agencies interested in acquisitions
Acquiring another agency may seem easy once you’ve done it five or ten times. You find a great candidate that fits your culture, check the financials, make an offer, complete due diligence, negotiate a contract, and close. See, it’s simple—I just described the basic process in one sentence.
Of course, we all know it’s not that simple. There are hundreds of pitfalls—or easy mistakes—that one can make, many of which need to be learned the hard way. But let’s start at the beginning: If you want to grow via acquisition, you start by getting your house in order, then you chart an acquisition strategy, and finally you begin to execute your plan. In our experience, many agencies skip that first step in their haste to get started, but they do so at their own peril. How do we know it’s important to have your house in order? It’s the first thing that many of our sell-side clients look at when they consider a potential buyer.
Get your house in order
Before you think about acquiring your local friendly competitor, before you invite them to lunch, and definitely before you put on your green accountant’s visor to analyze their books, you need to make sure that you’ve tidied up your own home. This concept of getting your house in order has three main components: financials, leadership, and culture.
Financials: Financially speaking, we believe your firm should run like a top-quartile firm—the best 25% in the insurance industry. Based on our experience, this means you should have double-digit organic growth and a respectable earnings before interest, taxes, depreciation, and amortization (EBITDA) margin in the 25% to 30% range, depending on your reinvestment strategy. EBITDA is a good proxy for cash flow, which is typically a firm’s first funding source when purchasing smaller agencies.
Organic growth is important because you need to grow in order to generate additional cash (or EBITDA) for acquisitions. Furthermore, organic growth is important because, as an owner, you need to be able to tell your story to prospective acquisitions; you won’t be credible as a solid operator and an acceptable partner if you appear to be stagnant.
If you want to grow via acquisition, you start by getting your house in order, then you chart an acquisition strategy, and finally you begin to execute your plan.
The need for organic growth and high margins may strike some as a bit odd, because a firm with strong profitable growth would not necessarily need to make acquisitions. But when you’re setting up an acquisition program it’s important to do so when you don’t need to do it. As an owner, you want to set yourself up so that you feel totally fine if (or when) you have to pass on a deal.
Think of this like prospecting for new business: A younger producer who needs a piece of business to put food on her table will be more likely to work with a client who consumes far too much time and resources relative to its commission level (the technical term for this is a “hot mess”). A more experienced producer, with a large book and a full pipeline, will sleep fine without that one lousy account and will pass up the bad account.
Set yourself up to avoid a hot mess, whether you are prospecting for accounts to write or for agencies to buy.
Leadership: Having strong talent in your key leadership roles is an important component of preparing to acquire. These key people may include the head of the commercial lines department and the chief financial officer. They need to keep their current operations running smoothly while focusing a significant amount of their time on integrating a newly acquired firm.
Keeping the current operation running is key in that it will allow the president to focus on finding acquisition targets, while knowing that the payroll checks will never bounce and the agency will continue to generate the cash flow necessary to stay afloat. Managing integration is an important factor in completing a successful deal (the other two being strategic rationale and cultural fit), and a deal without good integration is more like a donation to the selling principals.
Senior leaders should be empowered to set the direction in their units and march forward every day without needing to constantly extinguish fires created by sloppy process or poorly managed staff. They may spend significant time assessing, training, and potentially terminating staff of newly acquired firms while trying to build trust and rapport with the key acquired staff.
Like all good leaders, they must be able to recognize that their newly acquired partners may actually have a better way of doing certain things and should be able to adapt to these methods.
Beyond the skills necessary to integrate acquisitions, your leadership staff needs to be strong because they are part of your value proposition to potential partners. When you acquire, you must first sell the prospect on your agency—why should they sell their firm to you—and having rock stars leading your core units shows a prospect that it can have a good future as a part of the new firm.
Culture: Culture is a funny thing—it’s intangible, yet you can feel it immediately when you walk into an agency. Having a strong, well-defined culture is essential. Regardless of what your firm’s culture is, it’s important to understand the culture and to know its boundaries. This is important in assessing the cultural fit of a potential target and being able to articulate what cultural aspects are a hit or a miss.
Note that some seemingly minor cultural issues can seem disproportionately important to the rank and file staff. As an example, consider a buyer who seeks firms that embrace its core principle of going the extra mile for a client; this value is non-negotiable so the firm buys a target that has total alignment on this pillar. However, if that same firm is full of early birds arriving at 7:30 a.m. and the staff of the target firm wanders in at 9:30 a.m., issues are likely to arise, even though everyone is 100% aligned around going the extra mile.
Knowing your culture well will help you filter out the firms that fail the core value test and mitigate the minor issues that should not scuttle a deal but simply kill time and waste perfectly good aspirin.
The net take
Setting your agency up to acquire starts with an internal focus. If your firm is financially strong, loaded with rock star talent, and steeped in a great culture, you’ll likely have a line of candidates around the block from which you’ll be able to select the top prospects.
You’ll also sleep well at night knowing that you have made your agency both more valuable and more likely to remain independent if you choose.
Brad Unger joined Marsh, Berry & Co., Inc. (“MarshBerry”) in 2015 as a vice president on the Mergers & Acquisitions (M&A) team. In addition to his M&A advisory responsibilities, Brad also is involved with the firm’s financial consulting business. MarshBerry helps insurance agents, brokers and carriersas they work to maximize their value. Contact Brad at Brad.Unger@MarshBerry.com or 440.220.5435.
Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc.
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. Please feel free to send any announcements to M&A@MarshBerry.com. Source: SNL Financial and other publicly available sources. MarshBerry Opinion & Experience.
In addition to insight for agencies thinking about mergers and acquisitions, MarshBerry offers the following brief overview on the acquisition market—a sense of where the industry is and what’s taking place in the M&A arena. As of the third quarter of 2016, here’s what MarshBerry experts see:
Deal announcements this year are still behind the record-breaking pace of 2015, at 311 through September year to date (“YTD”) compared with 352 deals announced last YTD.
BroadStreet Partners, Inc., and AssuredPartners, Inc., are leading the pack of buyers, each with 22 acquisitions announced this year through September. Not far behind areAcrisure LLC (20 announcements) and Arthur J. Gallagher
& Company and Hub International Limited (both with 19 announcements). Of the top five buyers, all but Arthur Gallagher are private equity backed.
Interestingly, this month seven of the 30 sellers were either program administrators (six) or wholesalers (one). This includes ELMC Group LLC., which acquired another medical stop-loss managing general underwriter in the month, IOA Re Inc., and also sold a controlling interest in its own operations to the private equity investment firm J.C. Flowers & Company LLC. Program administrators and wholesalers have represented just over 18% of the YTD deal activity (57 of the 311 announcements).