After a brief slowdown during the height of the global pandemic, mergers and acquisitions in the insurance industry seem poised to reach record volumes in 2022. Deloitte reports that “92% of respondents expect deal volume to increase or stay the same for the next 12 months.” Agencies considering M&A as a growth or exit strategy need to be aware of the tremendous preparation needed to navigate the process successfully.
Failure to understand the practical and emotional aspects often results in delayed or derailed deals. Worse, unrealistic expectations can result in lasting regret over outcomes. Every M&A deal has its own quirks and challenges, so it’s difficult to talk specifics. Generally, however, principals in an M&A deal can expect to pass through the following five stages.
Phase 1: Preparation
First-time sellers and buyers often underestimate the importance of preparing for a merger or sale. The effort you put into this phase of M&A determines how smoothly the rest of the process will go. It can also affect whether you will get the best value from the eventual deal.
For sellers, a key part of preparation is getting an accurate valuation for the business. An outsider’s perspective is invaluable here. The Endowment Effect – often leads us to base perceived value on the effort and resources invested rather than objective worth. There are many companies out there that offer valuation services, but their fees can vary widely. If you’re considering using an M&A broker, ask if they include valuation in their services. And if your resources permit, consider getting a second and even a third opinion.
For buyers, now is the time to line up financing for a purchase, if needed. You’ll also want to build up reserves to see you through the inevitable disruptions that come during the integration phase. An M&A broker can help here as well. They can provide a realistic estimate of how much you can expect to pay.
In this phase, sellers also need to make sure that their house is in order. Due diligence is a grind under the best of circumstances. You don’t want to complicate or delay the process by trying to gather accurate information on the fly. Owners with a hands-on approach to management should be in good shape, as long as the business is well organized. But those who’ve moved away from day-to-day operations will need to re-familiarize themselves with the following areas:
- Strengths and vulnerabilities of team members and their short and long-term career goals
- Ideal client profile and current client mix, including top revenue generators and “difficult” customers
- Book of business, including projections for renewals and claims
- Any other revenue streams
You need to understand every item on your profit and loss (P&L) statement. Then, divest yourself of anything that doesn’t contribute to your bottom line in a meaningful way.
Buyers, especially those interested in acquiring an agency with a different focus, need to familiarize themselves with the new market. Acquiring companies also need to have a clear growth strategy and evaluate any proposed merger or acquisition in that context. After all, no agency is a “good deal” if it doesn’t move you closer to your long-term goals.
Lastly, this phase also allows people to prepare mentally and emotionally for the M&A process. This is especially important for sellers. They often have invested years – even decades – of their lives in their agencies and see them as their legacy. Buyers, too, need to make sure that they are prepared to integrate new teams members with a different workplace culture and other ways of doing things. (More about the need for compromise during the Integration Phase in Part 2 of this series.)
Expect to invest weeks and even months in this phase. It’s not uncommon for owners to start preparing for an eventual sale years before placing their agency on the market. In fact, there are even experts who advocate a build-to-sell approach.
Phase 2: Pitching the Sale
Much of the “burden” of this phase falls on the seller. After all, they are the ones putting an agency up for sale. It’s a good idea to have a list of viable buyers in mind as you enter the M&A process, rather than just posting an agency-for-sale ad in trade journals and hoping for the best. These may be industry contacts who’ve expressed an interest over the years, venture capital (VC) firms, and even competitors.
Sellers will want to vet potential buyers, especially financially, before entering into any negotiations. Similarly, buyers should research any prospective acquisition through publically-available records. While complete information may not be available at this stage, you can start to identify areas that warrant closer inspection in the Due Diligence Phase.
Protecting Your Team
If your team’s job security is a priority for you, be sure to incorporate that into your pitch/vetting process. Competitors may purchase a rival in order to shut it down or keep only those components that fill in gaps in their own offerings. VC groups often hold companies for 3 to 5 years and then sell them on, hopefully at a profit. Either scenario can have serious repercussions for the long-term job prospects of your employees. While all kinds of assurances may be offered, ensure that the purchase agreement includes enforceable language for any protections you hope to provide.
For sellers, it’s a great idea to have a pitch book for your agency. The point here is not to dive deeply into the nuts and bolts of the organization, Rather, you want to provide an overview of the company so potential buyers can decide if the two entities are a good fit. Keep it concise and on-point. Typically, the pitch book will contain:
This contains the essential information about the agency: its financial status, ownership, and employees. The reason for selling also appears here.
This section gives a “big picture” description of the history of the company, the products and services it provides, its employees and clients, and its tangible and intangible assets. Opportunities for growth are also highlighted.
This section explains the information required from potential buyers in their Letters of Intent. It also provides a timeline for the evaluation of offers.
This appendix includes important documents that prospective buyers may want to review. This might include more detailed financial statements, examples of standard contracts, organizational charts, and an overview of the book of business.
It is absolutely essential, however, that neither party shares any confidential information without appropriate Non-Disclosure Agreements (NDAs) in place. While many sellers use the same generic NDA for everyone, it can be worthwhile to customize the NDA based on who the buyer is and what they are after. First-time buyers may think that the seller’s need for confidentiality is greater, but you’ll be surprised how much you end up revealing about your company as negotiations progress.
Lastly, be aware that this phase can be a heady experience. If the agency in question is a desirable one, it’s bound to attract a lot of offers. But as a colleague put it, Don’t fall in love with every suitor. It can be tempting to favor large offers or ones from companies whose leaders are personable or whose workplace culture mirrors your own. Keep in mind what you want from the deal and consider each opportunity as impartially as possible.
How long this phase takes depends on how many offers you receive and how quickly they arrive. Take time to thoughtfully consider each one. You’ll want to narrow the field to a few “serious” offers as quickly as possible, though. Otherwise, early bidders may lose interest and move on to other opportunities.
Once you have a shortlist in hand, it’s time to move on to the next phases of the M&A process. These include the dreaded Due Diligence and Executing the Sale. Only then are you ready to face the final hurdle, Integration. We’ll cover these phases in the coming weeks, so be sure to keep an eye open for future articles.