There’s No Wrong or Right Time for an M&A

But Finding Financing Has Gotten Tougher

When it comes to acquiring an agency or selling, timing is everything. Hard market or soft market, good business environment or bad, the decision on whether to merge, acquire or sell is unique to each individual business and business owner involved in the transaction.

“I don’t think there’s ever a right or a wrong time to be looking at buying or selling other than what makes sense for you and your buyer or seller,” says William Kronenberg, Professional Underwriters Corp.

“There’s never a right time or a wrong time,” agrees Art Seifert, founder and former owner of Lighthouse Underwriters, now with U.S. Risk Underwriters. “A lot of times it has to do with your expectations in terms of your age, how long you want to work, how well you deal with being in a position where you’re no longer the person who calls all the shots.”

Timing also affects financial arrangements. Bank financing, which has been cheap in the past, comes with strings attached so agents have got be careful, Seifert says. Banks expect earnings and “there are times when earnings just aren’t what they are in other times. So timing has a lot to do with how happy you’re going to be with the deal.”

In an earn-out situation, in which payments to the acquired agency are tied to certain earnings expectations, if “the market starts to rise and you catch the hard market wave, you’re probably going to be very happy with that earn-out deal,” Seifert said. “If you’ve taken out bank financing, the bank’s going to be happy because earnings are great. But if you catch the wave just as it’s starting to come down and you catch the soft market … the banks won’t be very happy with your earnings. Banks have covenants and in the past they didn’t pay much attention to those. As long as you were paying on that debt nobody was all that concerned. Now they are. You can end up running your business to please the bank and that is an awful position to be in.”

A Cultural Fit

While money is important, Seifert explained, it’s a rare deal that plays out exactly as the seller envisioned. “A lot of whether you come away from a deal feeling good or bad about it will have to do with the emotional reasons around selling,” Seifert said. It’s critical, then, to make sure that if the seller is going to stay involved in the business there’s a good mix between buyer and seller. Without the right chemistry, a deal can sour quickly.

“I’ve seen it not work more often than it works,” Seifert said.

Konenberg agreed that a successful merger or acquisition has to be right for all entities involved. “We’re looking at a cultural fit,” he said. “It sounds soft; sounds hard to put a number on. But cultural fit is incredibly important in any corporation. You get your right price, you have the underwriting, but when you try to merge the two firms together, if that doesn’t work it could fall apart very fast.”

David Jordan, with Risk Specialist Companies, a member of the AIG Commercial Insurance Group, says when his firm is in an acquisition mode, the right cultural fit is among the most important aspects the company looks for. Culture “is especially important for us,” Jordan says. “When we call you up every 48 to 72 hours and ask you what your numbers are, we’re not kidding. We need to be sure on day one that the cultural fit is there because it’s a tough place to step into if you’re accustomed to being your own boss for a long period of time.”

A good cultural fit includes compatibility not only at the ownership level, but among the management team, as well.

Archie McIntyre, with Meadowbrook Insurance Group, says the management team that runs the business day-to-day is equally as important, if not more important, than ownership interests when his company looks at acquisition prospects.

He’s also looking for the story behind the acquisition target. “Everybody has a story about how they came to be where they are at today,” McIntyre said. “The good, the bad and the ugly, so to speak. I think you have to focus on history and how you came to be where you are today and what the mindset is in approaching a potential transaction.”

He said the management team has to be prepared to tell its story and to be able to openly address any weaknesses. “Because many times weaknesses can be our strength,” McIntyre said.

“We look at the management team,” says Chris Lalonde, with the private equity firm Century Capital Management. “We’re not going to run the business. “We’re not looking to come in and actually put our hands on the wheel and start making operational decisions. So number one really is the quality of the management team. Not just at the top level but a level below.”

McIntyre said his company also looks for the seller to have expectations and to be vocal about them. A potential area of trouble, McIntyre said, is when buyers’ plans turn out not to be what the seller thought they were.

“It’s alignment of expectations and alignment of interests, when you really get down to it,” Lalonde said. “There are points in time where the alignment of interests in terms of the buyers and sellers diverge. And therefore the goal becomes different. …

“A deal is really like a marriage. It’s sitting down and getting to know the partners at the table. Getting to make sure that everyone has the same expectation of what’s going to come out of this transaction and where we want to take the company together as partners. As well as making sure that financial interests are aligned.”

Financing the Deal

Century Capital, Lalonde said, is an “an investment firm that raises money for individual funds that have 10-year life spans. We then go and invest that money in terms of equity in businesses both for minority interests, as well as for control. Or whole buyout deals. We work with those companies to help them grow over a period of five to six years and then sell the company either to a strategic acquirer to take it public or help transition ownership to the next level of management.”

He said the current financial crisis in the United States is impacting the mergers and acquisitions market on several levels. Deals with large buyout firms that typically leverage their money through investment banks like Goldman Sachs or Merrill Lynch are frozen. “They’re not lending,” Lalonde said. Neither are traditional banks, not even to each other. The ability to secure debt through a traditional bank also is “pretty much closed at this time,” he said.

There are debt firms that provide debt financing, much like Century Capital provides equity debt and equity investments in the company, Lalonde said. However, “that debt has gotten extremely expensive. … Some pieces of that debt capital are almost as expensive as ours. Typically we’re looking for returns in the 25 percent year over year type range. A year ago you could get senior debt at 7 percent.” Now those interest rates can go as high as 20 percent.

Lalonde said his firm also can secure capital from investors that may include insurance companies and large investment funds. “Those groups themselves have been impacted by the credit crisis and have reduced access to the credit markets. And they are looking for places to invest their money. They’ve actually come to us and said if there are transactions where we can provide senior secured debt we’re interested in doing that.”

Ultimately, financing can be found even in today’s environment, he said. It may take a little longer because traditionally lenders relied on the due diligence of equity firms like his or that of the large acquiring companies. Now, “the pension funds, endowments and carriers want to do their own due diligence. And you will see the time frame for securing that debt increase a little bit versus what it was in the past couple of years.”

This article is based on a panel discussion that took place at the Target Markets Program Administrators Association Eighth Annual Summit in Tempe, Ariz., Oct. 15, 2008. The panel was moderated by Kevin Donoghue, Mystic Capital Advisors Group LLC. Panelists were: Chris Lalonde, Century Capital Management; Archie McIntyre, Meadowbrook Insurance Group; David Jordan, AIG Commercial Insurance Group’s Risk Specialist Companies; Art Seifert, U.S. Risk Underwriters; and William Kronenberg, Professional Underwriters Corp.

Topics Mergers & Acquisitions USA Underwriting Market