The landscape of agency acquisitions is as challenging as it is rewarding, requiring a delicate balance between strategic alignment, financial prudence, and cultural fit. IA Valuations’ CEO, Jeff Smith, and Director of Business Planning and Valuations, Craig Niess, led a conversation with industry experts Missy Kahl (Bickle Insurance), Vaughn Troyer (Hummel Group), and Rob Smith (Fideles Advisors) to share their insights on how to minimize risks and maximize value during the acquisition process, specifically relating to independent insurance agencies.
The group identified the following five areas that must be in alignment for a successful acquisition.
1. Strategic Fit: The Foundation of Successful Acquisitions
Before diving into the complexities of due diligence, the first critical step in any acquisition is assessing whether the target agency aligns with the buyer’s strategic goals. Vaughn Troyer, a seasoned professional with the Hummel Group, one of the largest privately held agencies in the Midwest, has shepherded over 20 acquisitions, emphasizes the importance of understanding the primary motivation behind an acquisition. “Is this a strategic play, a financial move, or a talent acquisition?” he asks. According to Troyer, it’s crucial to have a clear answer to this question because acquisitions, while they can look appealing from a P&L standpoint, can also be a significant distraction from an agency’s core focus on organic growth.
Rob Smith, with his extensive experience in the acquisition space, echoes this sentiment, stressing the importance of mindset, vision, and values. “You can adjust many aspects of a business, but you cannot easily change the fundamental mindset and values of the individuals involved,” Smith explains. For him, the key to a successful acquisition is ensuring that the potential partner shares a common vision and is committed to working towards a mutually beneficial outcome. This alignment of values and goals is the bedrock upon which the success of the entire acquisition process rests.
2. Cultural Fit: The Often-Overlooked Critical Factor
While financial metrics and strategic alignment are essential, the importance of cultural fit cannot be overstated. Missy Kahl, who has facilitated numerous acquisitions with Bickle Insurance, one of the fastest growing privately held retail agencies in the Midwest, highlights the need to evaluate the operational culture of the target agency.
“We really want to look closely at their culture and the operational aspects to identify areas of alignment, but also potential friction,” Kahl notes. She advises that understanding the cultural dynamics of the target agency, from its growth mindset and leadership style to its use of technology, is crucial in predicting how smoothly the integration process will go.
Troyer further elaborates on the importance of cultural assessment, suggesting that even simple observations, like the appearance of the agency’s office and the technology they use, can provide valuable insights into the agency’s values and operational style. He points out that a significant disparity in technological adoption, for example, could be a major tension point during integration. Additionally, gathering feedback from carrier partners can offer another layer of insight into the agency’s reputation and operational effectiveness.
3. Financial Due Diligence: Beyond the Numbers
Financial due diligence is the backbone of any acquisition process. It provides a clear picture of the target agency’s financial health and helps determine whether the acquisition is a sound investment. Craig Niess, our in-house expert in financial valuations, underscores the importance of reviewing three years of financials as a starting point. This approach allows the buyer to assess the agency’s revenue trends, profitability, and any potential financial red flags.
However, as both Kahl and Smith point out, it’s not just about the numbers. In today’s hard market, where revenue growth can be inflated by market conditions rather than true organic growth, it’s crucial to dig deeper. Smith advises looking at the renewal commissions line as a “source of truth” to assess the stability and growth of the agency. Kahl adds that examining the top revenue-generating clients and their contribution to the agency’s overall revenue can provide insights into the agency’s dependency on a few large accounts, which could pose a risk if those clients were to leave post-acquisition.
Troyer also emphasizes the importance of reviewing producer performance records. He argues that an agency’s claims of new business growth should be substantiated by the actual revenue generated by its producers. If the numbers don’t align, it may indicate that the growth is more a result of market conditions rather than the agency’s business development efforts.
4. Carrier Relationships: The Make-or-Break Factor
Another critical aspect of due diligence is evaluating the target agency’s carrier relationships. Kahl points out that carrier alignment can often be a deal breaker. Some carriers may not be open to transferring contracts in an acquisition, which can significantly impact the value of the deal. She advises prospective buyers to get carrier production reports and agreements early in the process to avoid unpleasant surprises later on.
Troyer agrees, noting that if a significant portion of the target agency’s business is with a carrier that the buyer does not have a relationship with, it’s essential to have an early conversation with that carrier. If the carrier is unwilling to appoint the buyer, it could devalue the deal or even derail it altogether. However, as Smith suggests, having a contingency plan can help mitigate these risks. By structuring the deal in a way that accounts for potential carrier issues, the buyer can protect themselves from unforeseen complications.
5. Legal and Operational Considerations: Preparing for Integration
Legal due diligence is another critical component of the acquisition process. Reviewing legal agreements, employee contracts, and understanding any existing obligations or liabilities is crucial in ensuring a smooth transition. Smith cautions against signing non-disclosure agreements (NDAs) or other legal documents without thorough review. He advises consulting with legal counsel to ensure that there are no hidden clauses that could have long-term repercussions.
From an operational standpoint, having a clear integration plan is essential. Kahl stresses the importance of having a detailed process in place before the acquisition is finalized. This includes understanding the technology transition, onboarding new employees, and ensuring that the combined entity can operate seamlessly from day one.
Troyer adds that it’s important for the acquiring agency to have its “house in order” before taking on the complexities of integrating another business. Dysfunction in the acquiring agency will only be magnified during the integration process, leading to frustration and potentially damaging the relationship with new employees.
Conclusion: The Path to a Successful Acquisition
First, agency acquisitions are complex and multifaceted, requiring careful consideration of strategic fit, cultural alignment, financial health, and carrier relationships. The insights shared by leading acquisition experts highlight the importance of thorough due diligence and strategic planning in minimizing risks and maximizing the value of an acquisition. By focusing on these critical areas, agencies can navigate the acquisition process with greater confidence and ultimately achieve a successful outcome.
Second, privately held retail agencies can succeed in the agency acquisition contest. With 30% of agencies owned by the Baby Boomer generation, the IA system is going to continue to experience massive wealth transfer. To stay competitive with the Private Equity backed mega brokers, retail agencies need to master the aforementioned skills to get their fair share of acquisitions.
Thank you to our fantastic friends Missy Kahl, Vaughn Troyer, and Rob Smith for joining the IA Valuations team for a thoughtful discussion. If you find yourself or your agency struggling with any of the mentioned situations, please reach out to contact@iavaluations.com to get started with help from our expert team.
This article was based on the transcript from an IA Valuations webinar: Minimizing the Risk of an Agency Acquisition and written with assistance from Chat GPT.
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 220 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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About the Author:
Jeffrey S. Smith, JD, CIC, CAE serves as Chief Executive Officer for Ohio Insurance Agents Association (OIA) and IA Valuations. He is responsible for leading the organization’s strategic initiatives and day to day operations.
As CEO of IA Valuations, Smith has consulted and reviewed over 200 agency valuations for independent agents across the US. IA Valuations serves independent agencies as a trusted advisor and strategic business partner as they implement strategies to increase their agency value, grow their businesses and transition their agencies. Smith provides insights into the agency’s operations, risk factors and legal guidance on how to perpetuate and maximize value in a sale.
