Are You Buyer Material?

Many agencies might not have considered selling in the past, but today’s attractive market has opened their eyes. For some, the time is right and valuation multiples are enticing. Agency owners are looking ahead: What’s the perpetuation plan? Will I get the same value from the business if I hold on to it for five more years? Many owners see an opportunity to leverage the market’s appealing conditions. They’re deciding to go ahead and sell. This can be great news for buyers too.

With more sellers in the market, buyers are more likely to find an ideal fit for their agencies, provided they can differentiate themselves from the pack. If buyers take the time to map out a thoughtful acquisition strategy (“Why do we want to grow through acquisitions?” and “What do we hope to gain by growing this way?”), they can target sellers that align with their goals and explain to the sellers why they are a good strategic fit for each other.

Should you be a buyer in today’s market? As you consider how to increase revenue, expand geographically, introduce new products and acquire top talent, do you have the ability to achieve these organically, or is it time to consider being a buyer?

Here are some key strategies that we see driving buyers to the market. Are you next?

Increasing Scale

Most buyers achieve some economies of scale when they make an acquisition – and contingent commissions are a significant advantage of scaling up. Larger agencies and brokerages get higher commission rates.

Another key driver of scale is related to expense reduction. Larger agencies realize economies of scale in technology or accounting and finance. With greater scale, these critical back-end expenses are spread out over a larger revenue base and have less of a negative impact on the bottom line. For the most part, the same technologies and accounting practices are necessary for agencies of any size. The difference is that larger firms have more revenue to offset the costs, making those operating and outlays a much smaller piece of the expense pie.

But there’s a catch here: You need to be willing and able to achieve these expense synergies, which may mean you need to eliminate redundant employees or take other measures to reduce costs.

Growing the Footprint

What opportunities for growth exist in your current market? For some agencies located in slow- or no-growth regions, expanding the client base is not so easy. Producers may feel tapped out, which is a good reason to consider widening the agency’s footprint through acquisition. Even smaller firms that do not “own” their local markets may find they’ve hit a wall-and unless they look beyond their existing service area, they may find it impossible to achieve growth goals. A strategic acquisition could enable you to expand your brand to new territory so you can increase your client base and your revenue. Additionally, geographic expansion can increase diversification, which is critical for sustainability.

To expand geographically, some firms identify attractive markets, plant a flag there with a platform acquisition, then continue acquiring “bolt-on” businesses to solidify their presence. Another agency may realize that it can expand its existing market as opposed to moving to a different region or state. It’s always a good idea for buyers to consult with professionals in states where they are not currently doing business so they can become familiar with regulations and market conditions. With knowledge of the rules and regulations, you can go into the new market with your eyes wide open and try to mitigate risk.

The key: Do your homework on new markets you are considering before pursuing an acquisition.

Acquiring Expertise

An advanced play for buyers that have already achieved some scale and expanded geographically is to acquire specific industry expertise. These buyers may realize that they could cross-sell to existing clients if they could offer a specific product or service.

Examples of specialty areas are healthcare, oil and gas, surety, hospitality, and professional liability. A prospective buyer may identify a gap in the firm’s capabilities and acquire an agency that has a specialty it desires to offer. Adding expertise can solidify clients and provide a tool for producers to capture new business they couldn’t have written before the acquisition.

The Takeaway

Here’s the takeaway: Decide what you want to achieve by acquiring another firm and develop a strategy to attain your objectives. Sit down with your management team and explore how being a buyer could benefit your firm. Put pen to paper-go through the exercise of writing down what your agency hopes to achieve from an acquisition.

Article By: Brad Unger

Source: Rough Notes