In response to today’s market dynamics, there is substantial consolidation in the benefits brokerage community.
An increasing number of owners are considering selling their firms — or the employee benefits portion of their business — to an outside company. Their goals: to monetize their asset, ensure long-term survival, and gain the stability and resources needed to better serve their clients’ evolving needs. This leads to the burning question: what will life be like after the close?
In my current position, I work closely with industry leaders who sell their businesses to Digital Insurance. Yet prior to joining the firm, I lived on both sides of acquisitions and integrations — having been a partner in a privately held company that was subsequently acquired several times, as well as guiding the transition process for buyers and serving as a consultant. These experiences provide compelling insights into what sellers can expect — and how to prepare for an optimal outcome.
Show me the money
Differences between expectations and realities may lead to the biggest source of sellers’ regret. Presumably, many sellers have an earn-out component, dependent on continuing to grow the business post-acquisition. A typical purchase agreement will have an upfront, guaranteed component and also may have material additional monies payable based on achieving certain growth objectives. The initial influx of cash to partners is welcomed and often eases post-transaction jitters.
For example, as a partner in a firm sold years ago to a publicly traded company, my shares of stock became liquid assets. Other shareholders and I could cash in if we chose to — an option we were very limited to exercise before. Naturally, we were delighted with this development.
Perhaps more significant, however, was the expectation that our producers would be introduced to contacts and relationships made possible by the bank that purchased our firm. These cross-selling opportunities were essential for continued growth.
For sellers whose earn-out is tied to meeting future sales objectives, this portion of the equation may be critical. In our case, initially, this concept worked fairly well — until the regional bank that acquired us was later purchased by a national bank. After this occurred, priorities changed, and the level of commitment and sales incentives we had agreed upon were not embraced by the new owner. Since we were no longer a key cross-selling channel for the commercial bankers, we never truly attained the promised traction from cross-selling.
Lessons to learn from this experience:
- When considering prospective buyers, be mindful of the strategic business focus of the company acquiring your firm.
- If cross-selling opportunities are being touted by the buyer, ask for specific details about this process, incentives and past two-year results to gauge the level of success from other firms that were previously acquired. The devil is in the details.
- What cross-selling incentives are in place? Are they clear and meaningful to both parties?
- Is the long-term success of your business and cross-selling opportunities important to the CEO of the acquiring firm — or is it just a local or regional priority?
- What happens to your agreements if the buyer is acquired by another organization and it changes commitments?
Protecting clients means locking in key employees
Our business — particularly in middle and small markets — is about the individual the client interacts with on a regular basis. If the people working with customers are happy and staying put, it will enhance your degree of success. If you lose a key person, that book of business is often put at risk. Even if you have non-solicitation contracts with producers, your clients are more likely to entertain discussions with other firms if their primary link to your firm disappears.