Staying in trust

Many agencies merge to create economies of scale. Indeed, economies are usually necessary so loans required for the merger can be repaid. Most often, agencies repay merger-related loans by taking money from the owners' compensation. Some owners find this unacceptable and instead raid the agency's trust account. Such an agency might be paying its companies on time, but if it's spending its clients' money, the agency is out of trust (which is defined as having a “cash + accounts receivable/accounts payable” ratio of less than 1.0).

Some agency owners have no problem with being out of trust, while others are adamantly against it. From a cultural perspective, an agency can have only one philosophy on this. (My strong recommendation is to always stay in trust, no matter what.)

Investments and spending

Money is often a contentious topic in mergers. For example, it is not unusual to see an agency that spends heavily on entertainment merge with a more frugal agency. Even when an entertainment expense is legitimate, a frugal person may have difficulty believing it is necessary. Unless the results of the expense are outstanding, this is likely to lead to considerable problems. One partner may declare, “My share of the profits will not be diminished by your extravagance!” Such differences must be addressed early. For different spending strategies to coexist, a compromise must be worked out in advance. For instance, compensation, travel, auto and entertainment expense money can be consolidated so that everyone receives a certain percentage and can spend it however they desire.

Investment strategies should also be worked out in advance. Will profits remain in the agency to support future growth, new producers, education, etc., or will they be distributed as compensation or bonuses? A difference in philosophy here not only affects how agency profits are used but has tax implications as well.

Sales culture

Trouble is sure to brew when an agency with a poor sales culture merges with one that has a good sales culture. Compensation is a particularly contentious area. Should reactive producers, who mostly just service business or have business handed to them, make the same as proactive producers? An agency is likely to lose good producers if this question is not fairly and intelligently answered before the merger. A good sales culture is difficult to develop; if one agency has it, that culture should probably dominate the merged organization. This sounds logical, but the other agency may find it a hard pill to swallow.

A good way to ruin a sales culture, a merger or even just a partnership is for an owner to take credit for sales that are really “house” accounts. In smaller agencies this does not really matter, because the owner gets paid the same either way (as long as no one else gets credit for these accounts either). But the math changes in a merger. If one owner is credited with “house” accounts, everyone recognizes that the owner is being paid on accounts for which he or she has done no work-and this means less money for everyone else. This issue must be resolved fairly and equitably upfront, before it festers and ruins an agency's future.

Procedures culture

Whose procedures will a merged agency follow? A common cause of E&O claims is lack of uniform procedures after a merger. I have seen agencies follow inconsistent procedures for years after a merger because they didn't want to hurt anyone's feelings. Just as the conquered in ancient Rome had to play by Rome's rules, merged agencies must have just one set of procedures. Merging procedures is key to successfully merging cultures, because procedures are at the heart of an agency. When an agency follows a certain process for many years, the process becomes part of the agency culture.

A merger actually provides an opportunity for the merged agency to improve its procedures by taking the best from each of the predecessor agencies. The best way to merge procedures is to evaluate the separate procedures one at a time, involving the staff in the process, and deciding what goes and what stays. When the kept procedures are incorporated into a new manual, the merged entity will no longer have an ABC Agency way and an XYZ Agency way.

The merger of agencies is very much like the joining together of different families to celebrate the holidays. Each family has its own traditions, and those traditions must be merged carefully and thoughtfully to ensure future harmony.

Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at [email protected].