Insurance Agency Insights
Insurance Agency Insights
M & A: The What, Where, When, and How of Acquisitions.
With a background as an acquisitions advisor to multibillion dollar corporations, Peter offers his insights into strategic growth through M&A. Whether you want to grow your agency in size, grow in a geographic area, or grow your product line offerings, a merger or acquisition could be a valuable strategy for your agency. Peter and Doug discuss various aspects of M&A that agency owners should be aware of when thinking about agency growth (Part 1 of 2).
Welcome to insurance agency insights where we're committed to helping small and medium sized agencies achieve their business goals. We're your hosts, Doug Burke, investment banker and advisor to the insurance agency industry and with me is
Peter :Peter Friedman. I'm the CEO and president of AgileCap, a specialty lender focused exclusively on the insurance agency industry. For over 20 years, we've worked with insurance agencies through the ups and downs of the US economy, to help them borrow money to grow their businesses for the future. Every other week, we'll bring you insights on how finance and capital can and will impact your agency's future.
Doug :Peter, we're going to start a two episode discussion of mergers and acquisitions. It's a big topic so we're going to break it into two episodes. But to start, why do people embark on acquisitions as a growth strategy?
Peter :Growth is an important theme for most business owners, as they think about building their businesses and whether that is for their own personal wealth or their personal desire to grow a business. When you think about growth, we put it into two buckets, broadly speaking. We think of organic growth, and this would be the year over year, sales and marketing, advertising...the slow and steady approach to growing your business. Growth in those scenarios usually is 3 to 5% per year. Most businesses experience it - well managed ones, maybe a little bit more - but within the cycles of the broader economy, that's the range of what we would consider organic growth: slowly added new customers, through your network, through your advertising, things of that nature. The other side of growth is inorganic. And that is is focused on acquiring, generally, or merging or buying business. And there's lots of different forms this can have. It can be a merger with a competitor, it can be a straight out acquisition of an entire business, it could be buying out a partner, or buying just a slice of a book of business. There's a variety of different ways, but that's broadly inorganic growth.
Doug :So is one better than the other, organic or inorganic growth?
Peter :So each has its benefits and risks associated with it, and in in many ways you need to do both. Organic is slow and steady, usually lower cost. It is a series of smaller decisions over an extended period of time. And think about your advertising strategy and how you may spend money month-over-month, and you can increase or decrease that spending. The risk associated with organic growth is you really don't know the outcome. You're going to put your advertising, your sales and marketing, and you don't know if it's going to work persay. You could try different strategies, things of that nature, until you find the one that works. It needs to happen, but it has a fair amount of uncertainty associated with it.
Peter :Inorganic growth is: you're buying a known factor - what you hope is a known factor - you do some diligence and you try to understand what is required. It requires diligence in the beginning, and then post-acquisition integration, but it's a more known thing that you're acquiring. You see the books of business and the financials associated with it. So, the downside of inorganic - and there's a general rule of thumb - they say 50% of acquisitions destroy value. Where you acquired something, and it's not what you expected you acquired, or you're not able to manage it the way you expected, and things of that nature.
Peter :So organic: slow, steady, required as part of your business. Inorganic: can give a big boost to your business, but it takes amount of expertise and hard work to do it, and sometimes you don't always know what you're buying. So, my view is it's really a balanced strategy. You've got to continue the organic growth - invest in building the relationships, maybe advertising, marketing, sales - but at the same time, look for the opportunities that are the right fit for your business, to do an acquisition or a merger with a competitor or things of that nature.
Doug :Peter, I want to ask you one other question, what is the difference between a merger and an acquisition?
Peter :So, an acquisition is one party taking complete control of another; and usually it's an integration into their business. So, Company A acquires all the assets, all the customers, all the book of business when it comes to insurance agency. So that A acquires B, and B essentially will, to some extent, disappear. In many ways, it's easier to do an acquisition because there's one controlling party. A merger is when A and B come together as one: we're two partners potentially. And that can be very complex, in many ways, because you have two individuals - usually owners of both A and B - who now need to get along and need to make combined decisions. It is generally occurring when there's significant strategic value - whether it's scale or geography or skill set or that A and B come together, but neither A or B want to be sellers. And so you have to willing buyers with the right strategy, and they recognize that there's real value in them coming together. Those are harder to do at the end of the day, but they can be really effective because now you have two powerful strong leaders who, if they can work together, can grow a business much more efficiently together. So, we have seen mergers work but I would say 80% of what we are supporting is acquisitions, where A is taking over B, primarily because you rarely have two willing buyers working together; it's more common to have a willing buyer and a willing seller.
Doug :So you deal with a lot of acquirers, but um, it takes two sides to make a transaction, you need both a willing buyer and a willing seller. What are the reasons for an owner of an insurance agency to want to sell their business?
Peter :That's a great question, because many times a buyer will say, "Well, why are they selling?" To some extent, it's not always clear, but generally speaking, the buyer is asking that question to understand if there's some sort of nefarious reason that they're selling. And in my experience, that's not been the case. There are situations where someone is selling because they need cash immediately, for some personal reasons. But most sellers are selling for three basic reasons: 1. They don't have a successor; maybe that's someone in their office they want to sell the business to or pass this off to. whether it's family or not family. 2. They have have things they want to do; a hobby or something else that they're passionate about. And 3. they've come to the awareness, whether that's some external event, whether it's age and retirement, and they've lost passion for the business. Those three things seem to generate most motivation for a seller: no successor, an external hobby, and some event that has opened up their eyes. So in today's world, with so much uncertainty with everything that's going on in the United States, a lot of times these types of external events will cause sellers to open their eyes and say, "Hey, maybe this is the time to sell. I've lost passion, there are other things I want to pursue in life - whether that's age-driven or professionally driven - whatever the case may be". So in times of uncertainty and the window of years afterwards, you might see sellers start to be more willing to sell.
Doug :So on the flip side, from the buyers viewpoint, what are the elements of buyer strategy that they should consider?
Peter :Prior to starting AgileCap, I was an advisor to multibillion dollar corporations who would do acquisitions all over the world. And the fundamental piece of their acquisition was it had to fit into the company's strategy. What were they looking to achieve as a business? And how did this acquisition fit into that? You know, reasons for this acquisition are: we want to grow, and we want to grow it maybe in a specific geographic area or specific type of business. But I would say they kind of fall into a series of buckets. The first is gain scale. So scale has material advantages to any business, but in the insurance agency world, you can kind of think about it: a single person can operate a business and it does $150 to about $200,000 of annual revenue. And as they grow, they need to add on staff and people and infrastructure and these types of expenses. So to grow, it might be more advantageous to acquire many of those things - those advantages. To build your book from $200 to $400,000, we'll call it, over a very short period of time, as an example, you need to bring in that sort of infrastructure, that knowledgeable staff, and that can be done through acquisitions. So gaining scale is a critical strategy that people utilize for mergers and acquisitions.
Peter :We've seen others removing a competitor in small towns or smaller cities. Sometimes there's a limited number of independent agencies, and it's highly advantageous to consolidate the business. That plays into scale as well. Most recently, we've been advising a Texas-based agency to look at an acquisition of their primary competitor in the town. And the competitor has priced the business exceedingly high, so it's going to be a very expensive decision for them. But ultimately, they believe in this town. To be the largest leading independent agent in this town, it is worth the price that they're going to have to pay, and it gives them a major strategic advantage in this geographic area.
Peter :We've also seen businesses want to expand into new product lines. We had an agent in California recently who looked into getting into the trucking business with limited experience in that space, but they saw the business opportunity. They recognized, to pursue an organic strategy would have been difficult; to acquire the carrier relationships and the knowledge and expertise to place the business appropriately would have been difficult. So they looked at acquiring a trucking business. It came with a book and a staff and the systems that enable them to further grow that business into other areas.
Peter :We most recently - as I think many people are aware - Nationwide has decided to take its exclusive agents to go independent. And part of that going to independent it's a requirement to gain a lot of skills, whether it's agency management systems, how do you work in the independent world. And we see many Nationwide agents as they make that transition in this year, to look at acquisition to not just organically grow those skills, but to acquire that skill. To acquire an office that has people who know how to work in the independent world, who have an agency management system, things of that nature.
Peter :Other ways that we've seen people implement a strategy is to gain access to better carriers, potentially in a region. It's not unusual. Certain carriers have a dominant presence in certain states, and if you don't have that dominant carrier in your portfolio, it's difficult maybe to grow the business; so you may acquire an agency that has access to that carrier and therefore allow you to continue to grow in a region. The last piece that we've seen is geography: expanding into new geographic markets, whether that's the next state over the next town, implementing a nationwide strategy. So it's all part of strategy - all this - whether it is gaining scale, removing a competitor, entering into new business lines, gain a skill set, access better or different carriers you need exposure to. These are all reasons that people implement their mergers and acquisitions or their growth in organic growth strategy.
Doug :You talk about the integration issues. What can go right or wrong when dealing with an acquisition, post-closing, from an integration standpoint?
Peter :Integration is a critical piece that many times is overlooked. All the effort is put into the acquisition or the merger, and to getting to that date and signing documents and sending checks out. And then there's a lot of people standing around saying, "Okay, let's go". And maybe the thought and processes as to how A and B work together or A acquires B have not been as well thought out. Our experience has been multiple acquirers who are successful, agencies that have acquired many books of business, that's one of their core skill sets that they're good at is integrating. A couple of things to think about in integration is, it is really personality driven - especially in smaller businesses. The larger the business - so multi billion dollars - there's a personality aspect associated with the integration and post-closing. But in many ways, it's about serving the customer and the products that they sell and things of that nature. The smaller the business, it is really about the personality of the owners. I mean, if there's only a handful of people in each office, they kind of have to really get along. That's a key piece of it. And if you can overcome the personality piece on the smaller acquisition or merger, many of the other pieces will work themselves out. And larger businesses, it's almost the opposite. Which means the personalities will take second fiddle to the questions of whether the products and all the systems work together appropriately. So integration is commonly overlooked as a key issue. Serial acquirers do it really well. And our recommendation is, if you're on one of your earlier acquisitions, to put a lot of energy into that. Yes, it's cool to acquire things, and it's interesting and your business grows overnight. But for that to be successful, it's important to focus on the integration process and the people who are involved in it.
Doug :You mentioned geography, and I think this is one of the most important elements of an insurance agency. It tends to be a local geographic business, does it not? And what are the considerations when you're looking at an acquisition strategy around geography?
Peter :Yeah, so there are only 40,000 (roughly) independent agents in the United States today. And that number, over the last decade, has grown plus or minus, but that's a rough number. At the end of the day, it can be a very local business, and you can't always pick where an independent agent is or a potential acquisition target is. So you need to look at your own strategy. And that's probably one of the key pieces here, as to whether you're going to be a local agent, whether you're maybe more of a specialty agent that focuses on a certain industry. We have a client of ours who's very focused on architectural businesses. These are small architectural agencies that are spread all over the United States, and there's no geographic concentration of those types of businesses. So they're really nationwide - and they kind of have to be - so for them an acquisition strategy is not a local strategy, it is a specialty product line strategy. It's finding agencies who have that skill set and have that book of business that they can grow into. And so you need to focus on your own strategy and what you want to be as a business...whether that's local - and you have a very strong position, maybe in your local networks and the rotary in the community, as the case may be - then maybe for you an acquisition strategy should be local-focused. The other big thing when you think about geography, and whether you should be local, regional or national, in some sense, is what is your capability as a business owner and leader, as the case may be, and how do you feel about traveling those distances and managing multiple offices? Do you have a clear Number Two person that you can take the management responsibility in this new area and pass it on to? We've had a client who was California-based, pursuing a growth strategy and came across a small, profitable, very effective agency in Oklahoma that they wanted to acquire. And our first question was, "How are you going to manage this?" And they were fortunate enough that the Number Two person in the California agency was actually from Oklahoma and was looking to return to that region. And so they had the management bandwidth or capacity to do a multi-regional strategy versus focus on California. That same agency executed it. The business is growing, it's doing well. That Number Two person is doing well. And they've come back to us and said, "Okay, we want to continue our multi-region and we're going to grow in southern and northern California". And so we, as a lender, but they, as well, saw within themselves that ability to execute that multi-region strategy.
Peter :So when you look at geography, I think the two key pieces are: 1. You and your management capability, your bench strength, who do you have you can work with? And then finally, 2. How does it fit in your strategy as to what you're trying to achieve?
Doug :Well, thank you, Peter. This has been very insightful and you've shared a lot of information with us. This mergers and acquisitions topic is very, very large. So we're going to continue our next episode with a discussion with Sam Patterson of the Spring Tree Group, who's a leader in advising insurance agencies on mergers and acquisitions. Sam will help us discuss how to execute acquisitions and what trends he's seeing in the market today.
Peter :Thanks, Doug. I'm looking forward to the conversation with you and Sam, in our next podcast. In the meanwhile, you can follow us on Twitter @Agilecapfunds or Facebook @Agilecap and finally at www.agilecap.com. You can sign up for our newsletter, and find other information that we're putting out every week.