Many agency owners would like to acquire another firm that is compatible with theirs. Agency owners today want to be buyers of agencies with books that might be a great fit with the same type of business the agency already writes. So, what is it that makes buyers more attractive to sellers?
In our consulting work matching buyers and sellers, we find that there are certain attributes of buyers that set them apart. This article addresses the attributes that could help buyers win the deal.
Remember the price that a buyer is willing to pay is not everything. Sellers have spent decades growing their company and are often emotionally attached to their staff and clients. Owners want to see the firm succeed after the sale.
For most firms however, organic growth is always the best way for an agency to grow. However, organic growth often cannot provide the level of growth that is needed for many different reasons. When that is true, these acquisitions of agencies or books can greatly help the agency acquire the volume they feel they need to attain in order to be a larger independent player in the marketplace or with their markets. If the firm is publicly traded they may need to provide more revenue to the owners or stockholders, so they may pay above average prices.
The attributes that make most buyers competitive include:
- Be flexible. Allow the practices of the seller’s producers to remain. For instance, allowing producers to keep their current compensation plan that may be higher than that of the buyer, including paying for accounts at a lower level size of account. This can be a critical deal breaker initially. The buyer can easily change it to their plan over time. For example, paying 25 percent renewal commercial lines commission on accounts under $1,500 in commission, versus 30 percent for accounts over $500 in commission. Grandfathering can be used for this for the existing book and new accounts could fall under the new program.
- Allowing producers to refer in new, small commercial lines and personal lines accounts to the agency and receive a first year only commission.
- If the seller has more efficient processes, talk to the new employees and see what they do differently before training them on the buyer’s systems and procedures. By doing so, buyers can improve their operating efficiencies.
- Some sellers won’t sell to an agency that does not have the same automation system, especially if the selling agency had a hard transition and the owners are not going to retire. From the start, the buyer should make it clear that they will keep the current system for a period of time and will also not make the seller pay for the change.
- The buyer needs to be open to allowing the current owners to stay on as producers. Or, even to just have a place to go while they transition their book. Sellers often don’t want to leave for a while. If the seller’s office is a separate location, maybe the seller can also help manage the branch location for a period of time. Going home and being there every day to do the “honey do” list, often keeps those owners from selling. This is especially true if they don’t have other hobbies, like golf, hiking, traveling, etc.
- Buyers that will listen to what is important to the seller and allow them those desires often win. Example: keeping the owner’s perks in place at a reasonable level or giving key employees a chance to shine under someone else’s management, such as a son or daughter.
- The terms of the deal can be more important than a high purchase price, especially tax issues. Buyers who will allow an agency owner’s family member, such as a son or brother to remain in the agency if they are capable and productive will win out. If they are in need of some training to be at the level the buyer wants them to be, then giving them that training can also work. Testing can also be done by the buyer before the sale on questionable family members or key employees to see if they have the right characteristics for the roles they are in.
- Allow the best of both firms to survive. Learn from the other and don’t assume one’s agency is superior. This could be discussed going into the deal so there is not an attitude of “it is our way or the highway.”
- Service of the seller’s clients will be similar or better. This is very important to most independents because a big change can affect clients and if they leave, the earn-out of the seller could be affected and they might earn less money.
- Sale of a C corporation is a problem because of the double tax if assets are sold and not the stock. If there are few producers, mainly the owners, then personal goodwill can be used and will save the owners the double tax.
Remember today is a seller’s market, which means that buyers must have some flexibility. When an agency is a good “fit” with the buyer, the price can usually work itself out with willing parties, especially if the attributes in this article are in place or an option. Having a third party to assist also can help.
There are key compatibility issues that buyers and sellers need to keep in the forefront when determining if a seller is a good “fit” for a buyer. These will be discussed in an upcoming issue.