M&As--thinking outside the box

Rough Notes, May 2003 by Di Stefano, Paul J

Acquirer II took an unusual approach that included a purchase of a portion of the agency's expiration list equivalent to the equity of the majority shareholder. The purchase would be achieved with cash and notes. This approach left the corporate structure of the agency in place and enabled the minority shareholder to retain his equity holdings. An agreed amount of net commissions would be retained by the agency with the balance of revenues captured by the acquirer. Thus the younger principal continued to own the agency stock and could agree to allocate compensation as desired.

Acquirer III's approach entailed an all upfront cash purchase of the assets of the agency. The younger principal would be given a draw for the next several years until

commissions on new and renewal business validated the draw. Acquirer III had a sophisticated telemarketing division which would provide a proven source of excellent leads to the producer. Acquirer IV's approach was a straightforward all-retention transaction. As a multiple of revenue, this offer at first blush would seem to be a potentially more attractive until one calculated a realistic attrition rate on the existing book of business. In addition, in this case, the acquirer was a bit shortsighted in not offering a draw for the producer against new business production or a commission on the agency's renewal business. The buyer's expectation was that the producer would live off the cash flow from the purchase price until he was able to grow his book. Unfortunately, other than providing markets, this acquirer would provide little assistance in new business production. This offer had the least credibility, and we viewed it as more of a "Hail Mary" pass.

As you can readily see from the above approaches, most have one or more uniquely attractive features from the seller's perspective which are based on either the unique business models of the acquirer and/or the structure of the transaction. The key to success as a buyer is combining the most compatible aspects of the acquirer's business with the goals and personal desires of the seller.

In summary, the structure of a transaction should be based on the wish list of the seller or merger partner as closely as possible. To some extent, the value of a transaction is in the eye of the beholder-in this case the seller. Upside protection may be more important than current dollars in a transaction. On the other hand, security of a payout may be more important than maximizing the purchase price. The role of active agency principals could prove a flash point. To effectively address these needs, the pursuing agency must first understand what drives the selling principals. E

By Paul J. Di Stefano, CPA, CPCU

The author

Paul J Di Stefano, CPA, CPCU, is the managing diector of Harbor Capital Advisors, Inc., a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger & acquisition representation, strategic and management consulting. Harbor Capital Advisors Inc., can be reached in New York at (800) 858-2732, and its Web site can be visited at www.harborcapitaladvisors.com.