Mergers and acquisitions

Agency growth and expansion through acquisition is the topic of discussion for the 28th episode of the Sharing Knowledge Series. Host Kevin Vonderau, EVP, chief lending officer at Westfield Bank, discusses how insurance agency owners can best prepare for growth while navigating the high interest rate environment and policy changes impacting the economic landscape with guests Josh Heebner, Dave Rivell, and Mike Wagar.

Josh and Dave are partners at Element Risk Management, and Mike serves as SVP, agency banking and specialty lines leader at Westfield Bank.

You might not be considering acquiring another agency or selling yours any time soon. But regardless of where you’re at on your business journey, it’s important to know the factors contributing to the current mergers and acquisitions landscape in the event that an appealing opportunity for growth arises. Afterall, some of the greatest opportunities in the business world are the ones you don’t see coming.

A bank’s role in mergers and acquisitions

An acquisition deal involves one agency (or any type of business) taking over another existing agency. The size and scope of an acquisition varies greatly, so it’s important to have a banking partner involved to help facilitate, structure, and fund the deal from a capital standpoint, for a buyer.

Banks also play an important role as buyers and sellers navigate a higher interest rate environment. Coming off a period of unusually low interest rates, everyone is still getting used to the higher costs of borrowing in recent years. “If you try to time the market, you’ll never do a deal,” Mike says of those who may be weighing the opportunity cost of holding off on doing a deal until the market is more favorable.

Valuations

“The valuation piece is the inflection point in the process, for us,” Josh notes. An accurate valuation requires transparency from all parties. A seller should be prepared to

• look back at all profits and losses in recent years
• do an accounting of necessary vs. unnecessary expenses - something that is more important during a period of inflation,
• evaluate talent, staffing levels and timing (is retirement approaching).

Another consideration from the seller’s perspective is how their desire to preserve their legacy impacts valuation, as an owner may want their name, the office, employees, or certain business practices to stay in place post sale. “In the absence of value, price becomes really important. But when all those other important intangibles of value to the seller are addressed,” Dave emphasizes, “…price doesn’t become the factor.”

“We’re a third best option”

Discussing the role that Element Risk Management plays as a potential buyer in the marketplace, Dave notes that agency owners’ top preferences are to find a family member or one of their employees to take over their business when they retire. But these options aren’t always feasible, which leads owners to pursue other avenues including an acquisition deal with another agency or private equity firms.

The importance of having a succession plan

Despite being key to a sound business plan, many small businesses, including independent agencies, don’t have a formal plan in place for when the inevitable happens. This lack of planning has an obvious impact on the future of these businesses and their employees, but there’s also a more immediate impact. Even if you’re several years or decades away from retirement, your agency is, in some ways, flying blind without a succession plan in place.

Not having a plan can hurt your market value, explains Dave, “...because you’re making it up as you go. There are some adjustments that you need to now tell stories around as opposed to here it is in black and white.” In the same way that your agency advises your clients to have individual or business risk coverage like life, homeowners, automobile, workers compensation, or commercial property insurance, a succession plan is a basic risk management strategy your agency should have in place. “Your team wants it, your lender wants it [for stability], your clients want it so they know that they can be with these folks for a while. It’s a basic business practice,” Dave summarizes.

It’s also important to remember that an effective succession plan only works if it’s put in place years before it’s put into action. This typically means up to a decade or more in advance of your target retirement age. Outside of driving monetary value, advanced planning helps leave both your employees and clients in a better shape with the change.

Non-competes impact on M&A

With the Federal Trade Commission’s move to ban non-compete contracts, the employment marketplace is set to become more competitive. Agencies should recognize this increased need to be a compelling place to work and have a rewarding career, or risk losing top talent. Without a non-compete contract in place, the valuation might, in some cases, be lowered because the employees are considered more likely to seek other job opportunities amid a transition. “I think it’s something to be cautionary of, I don’t disagree with you on the competitive nature of it, it’s going to make everybody better and piracy is a big part of that, and the solicitation piece of that too. I think those will be important details to flesh out and something that bears watching,” closes Mike.