By Chris Hughes
The most consistently effective way to achieve the maximum price for your business is to create a controlled auction for the business. A controlled auction is a process where there are several buyers that are submitting their best offers for your business. A range of buyers with different motivations for purchasing the company will place different and often higher values on the company in contrast to one or two buyers who are not subject to such a competitive process.
The primary objective in this Phase of the M&A Process is to maximize the value that a buyer will pay for the business. Here is the process that best achieves this objective: (1) define the target market of buyers that will pay the best price and/or value for the business, (2) develop and execute a marketing strategy to attract the best buyers, (3) prepare a Confidential Offering Memorandum, and (4) conduct a Controlled Auction, or other deliberate strategy to sell your business to the best buyer.
DEFINING THE TARGET MARKET
The first step in the Evaluation Phase is to define the target market. There are three (3) broad categories of buyers: (1) Strategic or Industry Buyer, (2) Financial Buyer, and (3) Individual Buyer. To obtain the best offers for your business, the logical process is to attractively market the business to those buyers that can realize the most value for the business.
Strategic or Industry Buyers: The strategic buyer is usually a company that is growing by acquisition or companies in the same industry that can derive additional value from acquisitions of companies in their industry. In the insurance industry, certain agencies and companies will place an additional or “strategic” value on particular books of business. Generally speaking, strategic or industry buyers will benefit the most from the “right” acquisition, and will pay the most value for the business.[1] Financial Buyers: Financial buyers are Private Equity Groups (PEG), or individual high-net worth individuals that are looking for investments and higher than stock market rates of return. Financial Buyers are interested in making 20 – 30% rates of return on their investment and can be found looking for companies and investments with Earnings or EBITDA of $500,000 and more. Individual Buyers: Individual buyers are typically retired individuals from corporate environments, or serial entrepreneurs that have had success in starting and running small to mid-sized companies. In the insurance industry, individual buyers often are high net worth producers for another agency, retired executives from insurance companies, or vendors of products that serve insurance agencies.
With an eye on the different types of buyers you will define exactly what your agency and book of business look like, the size and carrier mix of each of your product lines, the profitability of each business line, your geographic footprint is, and other agency specific information. Using this information, you will define the best target market for you business given the buyer types available.
MARKETING STRATEGY
After the target market has been identified, a cohesive marketing strategy will be put together to reach the intended target market and describe the business opportunity. The first step is to create a blind profile of the company, which will describe the last 3 to 5 years of revenues and earnings, the expense structure, and client base and carrier mix, as well as projections for the next 2 to 5 years. After a blind profile has been created, there are several marketing channels that will be utilized to reach the intended audience.
The first marketing channel is to selectively develop a list of the top prospective buyers in each category depending on the target market, and contact them on a confidential basis providing the basic information contained within the blind profile. For the most effective campaigns, this list should have a minimum of 10 strategic buyers that have a high likelihood of being interested in the acquisition of the firm. The second marketing channel is through the use of selective internet websites specifically designed to sell businesses, with some that cater specifically to the insurance industry. This marketing channel is primarily used for small agencies or books of business of less than $500,000 of revenue, or captive agencies such as Allstate agencies. The third marketing channel to use is through traditional media, such as industry magazines and publications, such as Business Insurance, PIA publications, National Underwriter publications, the WSJ, NY Times, and other broad media. The last marketing channel is through the use of the M&A firm’s proprietary databases and industry association and group contacts. After the business profile has been created, and a target market has been established, you will develop a combination of the above marketing channels that will work the best for your insurance agency.
[1] Of course there is always the agency buyer who is always “in the market” for acquisitions and may actively approach agency owners who may be open to negotiating just with him. Unfortunately, this buyer has no incentive of paying what the agency is actually worth.
