NEGOTIATING FOR AN INSURANCE AGENCY
Half of the agents who call us are frustrated and seeking ways out of the agency. The other half are looking for growth including acquisitions. We will get no fewer than ten calls each week from agents who tell us that if we have acquisition candidates available, they are interested.
Of course we have never been business brokers. We are consultants working on behalf of our clients. So, the acquisitions, mergers and sales with which we assist are done for agencies that we know intimately or who would like to have a relationship with us. We are not buying and selling businesses. We are looking for the right opportunities that fit the needs of our clients.
But the frustration of agents who call us out of the blue looking for acquisitions arises from their inability to do two things; 1) identify the local agents who are their most likely targets and 2) properly negotiate a Win/Win transaction with another agency.
Identifying Agencies for Acquisition --“I Don’t Want It Known That I May Be For Sale”
The first problem stems from the fact that most agents don’t want it known that they could be acquired. It could appear a sign of weakness even though it may be a very logical move on their part. They don’t want their clients, their employees and their carriers to think that they are “for sale.” So they are reluctant to contact other agents or to accept calls from friendly competitors or from other agents they don’t know well already.
When faced with this situation, it makes sense to use a consultant like Agency Consulting Group, Inc. to handle contacts with prospective agencies because firms like ours provide assurance of confidentiality related to the prospect. The task before the third party intermediary is to determine if the goals of each of the participants are similar enough to move from an inquiry stage to a due diligence stage. The acquisition candidate is assured that no identification information will be divulged in general or specifics (even to the initiating agency) until the candidate approves of moving the transaction potential to the next stage. The consulting firm or third party intermediary assumes liability for keeping all information confidential until permitted to disclose and introduce the participants.
This introduces the primary benefit of a third party intermediary both in the identification of candidates for sale or merger or acquisition and in the negotiation of the transaction, itself.
When the primary decision-makers try to identify their own candidates, there is a natural reluctance on the part of the candidates. They don’t know if you are fishing for information and determining if you are ‘for sale’ or if you are seeking new acquisitions. They don’t know if you might be using that information to influence clients, carrier relationships or employees.
But if an intermediary signs a confidentiality agreement, it assures the candidate that even YOU (the other party) will not be given their identity until the intermediary has determined the desirability and appropriateness of the potential transaction. And even then, they will know who you are before you know who they are to give them a last chance to back away if they don’t want to deal with you.
Negotiating for Agency Acquisitions
This is an art, not a science. You must know the purpose and scope of your reason for acquisition, but then you must set it aside in your attempt to determine whether you can satisfy the seller. Except in rare occasions, the seller is in control of the acquisition process because for every seller there are multiple buyers and money is only one (and, often, not the most important) consideration.
Every buyer would like to identify an acquisition opportunity, perform their due diligence and identify an appropriate value (to the buyer) and make an offer. Unfortunately, that’s not exactly how the process works.
Once the seller is identified he is either a reluctant bride or wants to do the sale yesterday. A buyer must win his way into the seller’s heart much like winning your way into the affections of your sweetheart. You wouldn’t get far by identifying that person as single, buying a big diamond and saying “How About It?”
Just as you get to know your sweetheart before proposing a permanent partnership, you must get to know your acquisition candidate before even mentioning the “A” word. Many candidates, like many single people, are not really in the market for a buyer/permanent partner. Only when they get to know you and realize how much you have in common does the potential of something permanent become reasonable to a potential seller. It is always best if the seller proposes the idea of the transaction. But even if that doesn’t happen, you want the seller to have a relationship and like you. This requires more than a cursory letter or e-mail communication. It means working for the relationship like you would with a desired new insurance client. You visit frequently with the purpose of making friends. You help in any way you can until it makes sense for that agency and yours to join.
Once you have asked the prospect “to dance”, the courting really begins. The valuation is a mix of what the agency is worth to you and what the seller needs or wants. If this can’t be dovetailed together, the deal will not be made.
If the seller needs more than the value of the future earnings potential of the agency to YOU over a reasonable period of time to settle debts, because of other financial burdens or to properly sponsor his retirement than you must understand that his priorities will prevail unless he has no other potential buyers. This doesn’t usually happen unless he doesn’t do his own due diligence.
Even if the dollar amounts can be set aside as sufficiently common to create a transaction, other factors may impede a successful conclusion to negotiations.
The most prevalent impediment to a buyer’s success is encountering a roadblock and becoming frustrated and simply giving up the transaction. This is a second reason it is usually best for a third party intermediary to handle the negotiations. If the seller disagrees with the position of the buyer an impasse has been reached. Both buyer and seller are typically high ego business owners and neither will lose face by changing views. However, when a negotiator is used, he, not the buyer reaches an impasse and he has the potential of consulting with the buyer before terminating any discussion. This provides an opportunity to analyze the impasse and identify solutions outside of the negotiation table.