Understanding Acquisitions: Taking the Mystery Out of Agency M&A

If you’re considering buying or selling your agency, the process can seem daunting. But, by better understanding the ins and outs of mergers and acquisitions (M&A), you can move ahead confidently with your plans.

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Reasons to Buy or Sell

Buyers are usually interested in one or more of three things: bringing on new talent (acqui-hiring), reaching new markets, or expanding their client base. Private strategic buyers and pure play private equity firms buy a business primarily for their investment value over a certain time window, typically five to seven years.

Sellers generally put their agencies on the market when they’re ready to retire or move on to a different business. Ideally, an owner should have an exit strategy outlined from the day they step into the ownership role, but a large number don’t start planning until far too late.

Steps in the M&A Process

The process can generally be broken down into three stages: preparation, evaluation and selection of a buyer, and due diligence and contracting.

Preparation 

This stage involves collecting and organizing all the necessary documentation so the agency can be marketed. The owner, CFO, banker, and/or M&A advisor work together to create a valuation of the business which will be the starting point for price negotiations. To accomplish this task, they must adjust the income statement of the agency to take out any forms of revenue that won’t continue under new management and take away any expenses that won’t apply (such as employment of family members). From this document, the pro forma EBITDA (earnings before interest, taxes, depreciation, and amortization) is calculated. Most price negotiations are based on a multiple of EBITDA. The team creates a one- to two-page anonymous fact sheet and a Confidential Information Memorandum (CIM) that can be sent out to potential buyers. This stage generally takes 30-45 days.

Evaluation and selection of a buyer

At the start of this stage, fact sheets are sent out to prospective buyers. Some sellers market to just 4 or 5 likely candidates, while others cast the net more widely. Prospects who express interest are asked to sign a non-disclosure agreement (NDA), after which they receive the CIM. If, after reviewing the CIM, prospects want to proceed, there will be in-person and/or Zoom meetings between the selling team and the C-suite of the prospective buyer. Next, prospects are invited to submit a non-binding letter of intent (LOI) along with their offer. The seller’s team will evaluate the offers, choose one, and then enter into a 60- to 90-day exclusivity period. From sending out fact sheets to signing the LOI usually takes 60 to 90 days.

Due diligence and contracting

This third stage is when all parties carry out their research into the finances and legal situation of the businesses. The lender will carry out financial due diligence to confirm that the combined company will have adequate cash flow to support the debt service on the loan. The companies’ attorneys will do legal due diligence and create a series of contracts that will include the purchase agreement along with agreements pertaining to personnel, clients, and any outside entities (such as carriers for an insurance agency). This stage takes about 60 to 90 days.

At the end of these stages, the deal moves into closing.

Challenges in M&A Deals

M&A deals can run into problems, especially if buyers and sellers are not adequately prepared. A common difficulty is simply that buyers don’t have their agency and personal financial documents in good order before they start the buying process. They should have three years’ worth of financials, along with business and personal tax returns for the last two years. They should also have records of all contracts under which they work.

Sometimes a deal can be disrupted if the buyer or seller loses a major client or significant member of their team during the M&A process. This situation can happen if an agency has too much concentration risk, i.e., too much dependence on one or two clients or a single producer on the team. It’s good management practice to avoid concentration risk under ordinary circumstances; it’s especially important during negotiations for buying or selling a business.

Realistic Timelines

It’s important to recognize that the process actually starts long before putting an agency on the market or putting in a bid to buy one. Ideally, an owner should be thinking about their exit from the agency from the first day they take on an ownership role. If the owner wants to pass the agency on to an internal successor, that process should start several years before the owner wants to exit. The intervening years are the perfect time to help develop the successor’s ownership skills and allow them to buy into the business over time. Oak Street Funding can structure loans to make it easier for younger successors to buy in by using the current business as collateral on a loan.

Buyers should make sure their own agency is healthy before trying to acquire a new one. They need to make sure their teams know that growth is in the company’s plans, so that no one will be taken by surprise when an acquisition is announced.

Final Tips

Buying or selling an agency doesn’t have to be intimidating. Oak Street Funding has over 20 years of experience lending to insurance agents. We offer acquisition loans, succession loans, and working capital loans. It’s never too early to start talking with a lender about your business and your plans for it. Contact us today for a no-obligation consultation and see how we can help you meet your goals for your agency.