art of the agency deal, The

Rough Notes, Oct 2003 by Di Stefano, Paul J

For this column's title, I have taken the liberty of modifying the title of one of Donald Trump's books. I assure you, however, that this will not be an egocentric exercise, as was the former. What I would really like to explore in this article is the concept and the reality of negotiations. There is a misconception regarding the concept of negotiating which unfortunately leads many agency owners to think that they are perfectly able to negotiate for themselves. The reality is that the ability to negotiate consists of more than the skill of being a poker player. The ability to negotiate effectively is to a large extent based on having the greatest detailed knowledge of the facts and circumstances surrounding an opportunity.

When there is the prospect of an agency sale, it is certainly not the time to play fast and loose with what is in many cases the agency principal's major asset. The first issue that most agency principals ponder is the value of the agency. While many technical formulas are available to value an agency-none of which I will bore you with here-the real value is ultimately what "the market" will pay for the agency. The next logical question which principals should consider is how one determines "the market." Is the market simply what another agency may have offered after some initial discussions, or is it a much more complicated matter? The answer is that "the market" can be assessed from a number of perspectives.

The first perspective entails reviewing recently consummated agency transactions and then attempting to compare one's agency with the acquired agency and apply the terms of those transactions to your agency's numbers. That exercise may seem simple at first, but be careful that you are not comparing apples and oranges. In order to make a valid comparison, one must first obtain sufficient information regarding the specific parameters of the operations of comparable agencies that have been recently purchased. The reality is that this may prove to be a rather difficult task since transactions between privately held agencies are usually not disclosed and even in the case where the buyer is a publicly held company, there may be no requirement to disclose the financial details of specific transactions. Unfortunately, rarely can one drill down into the operating results of the agency acquired by a public company; and without that information it is not possible to compare the acquired agency to one's own agency in terms of profitability and business mix.

So if all this information is difficult to determine, how does an agency principal know if he is negotiating the optimal deal when selling his agency? The answer can be found in viewing the market from other perspectives such as by looking at the universe of potential acquirers for an agency. The next logical question is how does one go about making up a comprehensive list of this universe which, again, for the average agency principal may not prove to be the easiest task. Agents are usually totally focused on their own agency and other than possibly taking note of transactions of competitors and higher profile transactions covered in the trade press, most agency principals spend little time focusing on the comings and goings of the merger and acquisition arena. In fact, we routinely find that many of our clients have little knowledge of a surprising number of the prospective acquirers, which Harbor Capital introduces in sell side assignments.

Even assuming that agency principals are aware of the universe of prospective acquirers, the next hurdle which must be addressed when contemplating the sale of the agency is how to initiate discussions with these acquirers. Other issues to grapple with include how to create the necessary leverage needed to maximize shareholder value, and how much consideration can be demanded before potential acquirers will walk away from a deal. The risk is that buyers will walk away from a deal much sooner that many might expect. Encouraging a buyer to come back to the table is not the easiest thing in the world to accomplish. Once one loses the advantage of being actively courted in the deal process, negotiations become an uphill battle from then on. Requesting that a buyer come back to the table typically encourages the expectation of further concessions from the seller.

In the last several months, we have begun to hear of more and more cases where buyers have walked away from the table because the seller's expectations were unrealistic. Needless to say, sellers are not well served by that course of events. The consistent theme of these aborted discussions seems to be that the sellers were representing themselves without the advice of a financial intermediary such as Harbor Capital. Prospective buyers can be easily turned off when negotiations are not handled in a professional manner. It is not surprising that in the current overheated market for agency acquisitions, more and more deals are collapsing due to intransigence on behalf of buyers and sellers.