Acquisitions for Agency Owners: Four Red Flags to Look for in the M&A Process

September 24, 2024

An agency owner could have multiple reasons for considering the sale of their business. These reasons could include the desire to refocus their energy back on leadership and sales versus growing an enterprise, a change in their circumstances or an urge to take their business to the next level (click here to read more on this topic).

However, not all acquisitions go smoothly—whether you're in the insurance business or another industry. When engaging with a potential buyer, here are four red flags you'll want to consider.

1) A fixation on your financials and not your team

During a six-to-eight-week acquisition process, it's normal and even a part of the due diligence process to review financials. Yet, some buyers might focus too intently on an organization's financials rather than take a more holistic view of the business's people, culture, and resources, in addition to the financials. The question is: Is that intense focus representative of the way the organization will operate once you've been acquired?

TIP: If there's no discussion of how to transition your team and ensure customer satisfaction with the move, reconsider whether this is the best partner for you. Finding that balance between both is vital.

2) Retreating on previously agreed-upon terms

A successful acquisition is much like a successful marriage. If you rehash the same issues with your spouse again and again, the relationship will not go down a good road.

During the acquisition process, you will need to make multiple decisions, so try your best to honor those already agreed upon. Often, buyers and sellers will change their minds, but if a potential buyer continues to renegotiate every point—including the minor items—you may find yourself asking: Are they really in it for the long term?

Successful long-term partnerships involve a lot of give and take. If you're looking for a lasting partnership, both parties may have to agree on a few items they don't necessarily love.

TIP: Avoid nickel and diming or one-way relationships where one party tries to take as much as possible from the other. Look for a buyer who will negotiate reasonably and accommodate certain items for you in the deal. During negotiations, focus your energy on the pieces of the agreement that move the needle.

3) Excessive emphasis on the business's costs

Is your buyer looking to manage quarter to quarter, or do they have a long-term view of the business? It may be an issue if they're too focused on reducing quarterly expenses without taking a long-term view.

There are always opportunities to make small changes to increase your efficiency. Some can be good, others not so much. Buyers that focus too much on the short-term costs will often cut teammates and then rehire them if needed in the future. If you want to see long-term success for your team and your business, you should look for a buyer with a people matter approach—firing teammates because of a short-term financial focus does not match this approach.

Ideally, buyers should concentrate on acquiring firms already operating at a high level, not fixer-uppers. If a buyer is too focused on expense synergies, they likely think you need to operate more efficiently.

TIP: Before making a change, consider its impact on your team, both psychologically and personally. Only implement a change if you think it will make your teammates feel valued. Help them see the benefits of the new acquisition/buyer over the long term.

4) Little discussion on mutual improvement between buyers and sellers

Buyers and sellers can make each other better, but a lack of discussion on how can be problematic.

It's essential to discuss how both organizations can benefit each other. If you don't, why are you agreeing to be acquired by them? You need to demonstrate to your team that this sale is a good thing, and this dialogue will help you do so.

Additionally, if a buyer constantly tells you how they will make you better but never acknowledges how you can make them better, that's not a good start to a successful marriage. A successful marriage is a partnership that brings out the positive attributes of both parties.

TIP: Nothing makes new teammates feel more valued during an acquisition than the first time they realize their processes and ideas are improving the parent organization. Everyone likes to add value. Spending time articulating how both sides will make each other better helps both feel this transaction will ultimately lift each party up.

What's your plan?

If you are considering the sale of your business, staying aware of potential red flags from a buyer will help you through the process. If you want to ensure that your team and customers will remain a priority after you sell, consider joining the Brown & Brown team.

Interested in speaking with our Mergers & Acquisitions team? Email acquisitionsdept@bbins.com or contact us directly.

Acquisitions for Agency Owners
by Vaughn Stoll, SVP & Director of Acquisitions

Subscribe to Vaughn’s Acquisition for Agency Owners and view this blog on LinkedIn here.