Moving from a Position of Strength

Merging, acquiring or clustering requires patience and due diligence.

Independent agents braved bitterly cold weather and a standing room only crowd to hear William Schoeffler of Oak & Associates outline strategies for merging, acquiring and clustering agencies. Schoeffler spoke during the Joe Vincent Management Seminar and Big I Legislative Day, hosted by the Independent Insurance Agents of Texas at the Renaissance Hotel in Austin, Texas, in late January.

He suggested situations that may require such actions include a pending retirement, major life change, major problems with carriers and major staffing or management issues.

“The goal is to make business moves when your company is in a position of strength, not weakness,” Schoeffler said, noting other good reasons to consider a change in agency status include a desire to increase clout with carriers, expand sales, add new locations, increase management depth, reduce business risk, reduce expenses or a common vision. Two reasons that should never determine whether or not to consider a merger, acquisition or cluster are: “Good friends or family obligations … This is business, it’s not personal.”

To determine if a business combination makes sense for you, Schoeffler suggested the first step is to know the makeup of the agency. “Figure out your goal and time frame,” he said. For example, if the intent is to build the business up over the course of the next five years and then retire, it may be better to merge with a younger firm whose goal is more long-term.

Step two, according to Schoeffler, is to figure out what the rest of the world is doing that is beneficial. “Determine what markets you can use, what market relationships you need and what client services are available. Take a look at what type of staffing other firms have and what specialty services they offer. See what the productivity or profitability is of other firms.”

Perhaps an equally important step is to determine whether or not the agency can meet stated goals. “Step three is to assess whether your agency can meet your goals through internal growth or change,” Schoeffler advised. “Determine if you have the skills, talent and time necessary, and whether the necessary capital is available.”

Step four is to review the agency’s options. “List merger, acquisition, cluster and selling options to determine which one will allow you to reach your goal the fastest and with the smoothest transition in the most cost effective manner,” he added.

Date or marry?
He noted the importance of being objective in determining compatibility and likened it to dating versus marriage. “Allow for a transition period in case something pops up that may have been previously overlooked,” he said. “Look at the agency’s philosophy, its book of business, its goals, the financial approach and growth potential.” In addition, it is important to determine whether an opportunity exists for improved clout and market share. “Find out if any contingencies exist in the overall management and operation. And compare strengths and weaknesses,” Schoeffler said.

He advised defining the agency’s ideal candidate. “Remember that you will be combining operational structures and look for matching market resources. You want to find compatible profiles of the book of business and be sure to have similar financial profiles. Make sure there is a common agency goal and expectation. Maybe your strength and weakness contrast and will cancel each other out.”

Schoeffler recommended that an agency factor in what the bottom line would be when determining the value of an agency.

“The value of most insurance agencies is based primarily on the earning capacity,” he said. Components of value can be broken down in terms of sustainable earnings, risk, tangible net worth or equity. The sustainable earnings are the potential earnings streams that the firm can sustain over a period of time, also known as pro forma profits.

“Also determine the likelihood that the earnings streams will continue in the future,” he added. “Combine that with other strengths and weaknesses of the agency, the book of business and management. What is left in the balance sheet once all doubtful and intangible items have been removed? Any remaining assets should be used to satisfy actual and contingent liabilities.”

When creating or analyzing an offer, determine the agency value, what the terms of the deal are and what the equity in the new entity is going to be.

“Define the management roles. Deter-mine the staff structure and what the owner compensation is. Streamline the operation of the new entity as much as possible,” he said.

When closing the deal, he said there are going to be negotiations involved and a possibility of counter offers. “Before closing, lay out the terms of payments using attorneys and CPAs for proper legal documents and tax consequences. You want to bring any skeletons out of the closet through due diligence.” He said to “dig deep” and even suggested calling clients.

Be able to walk away
His final recommendations included having a honeymoon period so as to not jump into anything too hastily.

“Allow yourself one year at least to determine whether or not you have missed anything. Have the appropriate documentation in place to terminate the relationship if necessary. Sleep on it and be able to walk away at any time.”

He explained, “There are few, if any, reasons to rush, so examine why either party feels compelled to rush into things. Maybe one of you is short of cash and desperate to lower or consolidate expenses. Maybe there is some fundamental problem with the business.”

He warned against being in love. “Often the principals are so happy with each other that they are unable to see any reason anything could go wrong.”

He said to be sure to ask the tough questions about compensation, management roles or business philosophy. He also recommended rotating or spreading around the management roles and responsibilities to ensure everyone is well versed in the operation. He emphasized proper due diligence. “Really know the other party and check references to find any problems before it is too late.”

Topics Agencies