The landscape of agency acquisitions is as challenging as it is rewarding. To be successful, an acquisition requires a delicate balance between strategic alignment, financial prudence, cultural fit and more. When all these elements are in place, acquirers can minimize risk and maximize value.

Here are five areas that must be in alignment to make an acquisition successful:

1) Strategic Fit: The Foundation of Successful Acquisitions

Before diving into the complexities of due diligence, the first critical step in any acquisition is assessing whether the target agency aligns with the buyer's strategic goals.

Vaughn Troyer, president of Hummel Group in Millersburg, Ohio, has shepherded over 20 acquisitions across the finish line and emphasizes the importance of understanding the primary motivation behind an acquisition.

“Is this a strategic play, a financial move or a talent acquisition?" he asks, pointing out that it's crucial to have a clear answer to this question. While acquisitions can look appealing from a profit and loss standpoint, they can also be a significant distraction from an agency's core focus: organic growth.

Rob Smith, founder and CEO of Fiedeles Advisors in San Antonio, Texas, has extensive experience in the acquisition space and echoes this sentiment, stressing the importance of mindset, vision and values. “You can adjust many aspects of a business, but you cannot easily change the fundamental mindset and values of the individuals involved," Smith explains.

For Smith, the key to a successful acquisition is ensuring that the potential partner shares a common vision and is committed to working toward a mutually beneficial outcome. This alignment of values and goals is the bedrock upon which the success of the entire acquisition process rests.

2) Cultural Fit: The Often-Overlooked Critical Factor

While financial metrics and strategic alignment are essential, the importance of cultural fit cannot be overstated. Missy Kahl, partnership director at Bickle Insurance in Creston, Ohio, who has facilitated numerous acquisitions with Bickle Insurance, highlights the need to evaluate the operational culture of the target agency.

“We really want to look closely at their culture and the operational aspects to identify areas of alignment, but also potential friction," Kahl notes. She advises that understanding the cultural dynamics of the target agency, from its growth mindset and leadership style to its use of technology, is crucial in predicting how smoothly the integration process will go.

Cultural assessment is crucial and even simple observations, like the appearance of the agency's office and the technology they use, can provide valuable insights into the agency's values and operational style. Significant disparity in technological adoption, for example, could be a major tension point during integration. Additionally, gathering feedback from carrier partners can offer another layer of insight into the agency's reputation and operational effectiveness.

3) Financial Due Diligence: Beyond the Numbers

Financial due diligence is the backbone of any acquisition process. It provides a clear picture of the target agency's financial health and helps determine whether the acquisition is a sound investment. Craig Niess, director of business planning and valuation at the Ohio Insurance Agents Association, underscores the importance of reviewing three years of financials as a starting point. “This approach allows the buyer to assess the agency's revenue trends, profitability and any potential financial red flags," he says.

However, both Kahl and Smith point out that it's not just about the numbers. In today's hard market, where revenue growth can be inflated by market conditions rather than true organic growth, it's crucial to dig deeper. Smith advises looking at the renewal commissions line as a “source of truth" to assess the stability and growth of the agency.

“Examining the top revenue-generating clients and their contribution to the agency's overall revenue can provide insights into the agency's dependency on a few large accounts, which could pose a risk if those clients were to leave post-acquisition," Kahl adds.

Troyer also emphasizes the importance of reviewing producer performance records. He argues that an agency's new business growth should be substantiated by the actual revenue generated by its producers. If the numbers don't align, it may indicate that the growth is more a result of market conditions rather than the agency's business development efforts.

4) Carrier Relationships: The Make-or-Break Factor

Another critical aspect of due diligence is evaluating the target agency's carrier relationships. Kahl points out that “carrier alignment can often be a dealbreaker." Some carriers may not be open to transferring contracts in an acquisition, which can significantly impact the value of the deal. She advises prospective buyers to “get carrier production reports and agreements early in the process to avoid unpleasant surprises later on."

Troyer agrees, noting that “if a significant portion of the target agency's business is with a carrier that the buyer does not have a relationship with, it's essential to have an early conversation with that carrier," he says. “If the carrier is unwilling to appoint the buyer, it could devalue the deal or even derail it altogether."

However, having a contingency plan can help mitigate these risks. By structuring the deal in a way that accounts for potential carrier issues, the buyer can protect themselves from unforeseen complications.

5) Legal and Operational Considerations: Preparing for Integration

Legal due diligence is another critical component of the acquisition process. Reviewing legal agreements, employee contracts and any existing obligations or liabilities is crucial in ensuring a smooth transition. Smith cautions against signing nondisclosure agreements or other legal documents without thorough review. He advises consulting with legal counsel to ensure that there are no hidden clauses that could have long-term repercussions.

Kahl stresses the importance of having a detailed integration process in place before the acquisition is finalized. This includes understanding the technology transition, onboarding new employees and ensuring that the combined entity can operate seamlessly from day one.

Troyer adds that it's important for the acquiring agency to have its “house in order" before taking on the complexities of integrating another business. Dysfunction in the acquiring agency will only be magnified during the integration process, leading to frustration and potentially damaging the relationship with new employees.

The Path to a Successful Acquisition

Agency acquisitions are complex and multifaceted, requiring careful consideration of strategic fit, cultural alignment, financial health and carrier relationships. By focusing on these critical areas, agencies can navigate the acquisition process with greater confidence and ultimately achieve a successful outcome.

With a large percentage of agencies owned by the baby boomer generation, the independent agency system is going to continue to experience massive wealth transfer. To stay competitive with private-equity backed mega brokers, retail agencies need to master due diligence to get their fair share of acquisitions.

Jeff Smith, J.D., CIC, CAE, is CEO of IA Valuations and the Ohio Insurance Agents. This article is based on the transcript from an IA Valuations webinar, “Minimizing the Risk of an Agency Acquisition," and written with assistance from ChatGPT.