Insurance agencies contemplating a merger or acquisition should employ a “tactical approach” to identifying takeover targets, determining in advance the potential of a proposed deal and whether the combination would fill gaps in their organizations.

Agencies looking at a potential target should also do so from the perspective of whether the proposed deal would help put their organizations where they want to be in three-to-five years.

These prescriptions for success in building an agency through mergers and acquisitions was outlined by Steven Wevodau, managing principal and an M&A specialist at Harrisburg, Pa.-based WFG Capital Advisers, during a seminar here on “Mergers & Acquisitions & Other Strategic Alternatives to Maximize Shareholder Value.” The seminar was hosted by WFG and The National Underwriter Company–parent company of this newsmagazine.

Paul Mattaini, a partner with the law firm Barley Snyder LLC, with offices throughout central Pennsylvania, cautioned that based on his experience, merger “transactions seem to be more difficult to get done over the past five years.” He cited two main reasons why an acquisition fails to live up to expectations:

o First, there is a tendency to “do the deal, then do nothing,” he said, describing situations where the acquirer doesn't make full use of the acquisition.

o Second, there is what he termed “acquirer arrogance”–in which the buyer acquires a successful outfit, then changes how it operates so it will fit into the new organization.

He also said that both buyers and sellers often perceive potential deals inappropriately. Buyers, he warned, can go into negotiations with unrealistic expectations, especially regarding time. “It always takes longer than people think [to do a deal]. It is a process.”

On the other hand, many sellers expect to get their asking price paid on closing day and walk away. “That's wonderful, but I can tell you it doesn't happen very often,” he said.

“It can be a very emotional process” to sell a business–especially if it was owned by a parent or grandparent, he advised.

Moreover, the amount of time it takes to put a sale together can actually have an effect on the transaction, he noted. “People get so into the process that the underlying business starts to underperform,” according to Mr. Mattaini, who added that such a development “almost certainly can have an effect” on the ultimate price that is paid.

He also mentioned the “cultural aspect” of a transaction–using the example of banks, which have a different structure than insurance agencies and may not be comfortable with a producer making more than executives or the looser scheduling, he noted. “You have to step back and say, 'Is this the same deal that I thought it would be?'” Mr. Mattaini said.

He also emphasized due diligence, saying it's “often not done early enough or thoroughly enough.” He said buyers should be careful about committing to anything until they've looked comprehensively at the target's internal affairs.

Mr. Mattaini warned that sellers, as well as buyers, need to conduct due diligence and to consider the question of when they should reveal all to the buyer. “There's no great answer” to the question of when a seller should “open up the whole cabinet,” he said.

Whenever due diligence occurs, he warned sellers, they should have confidentiality agreements to protect their business and trade secrets. “Make sure you have one, and make sure you've had someone look at it” to guarantee it provides the right protection if the deal ultimately falls through, he said.

Mr. Wevodau agreed, urging sellers to conduct what he called “reverse due diligence” to, among other issues, ensure that the buyer can actually make the transaction happen.

Amid other advice offered at the seminar, sellers were told to contact people who made deals with the potential acquirer to see how their experience played out, while also examining how the acquiring firm plans to operate the business being sold. Specifically, sellers were urged to find out how the new owner intends to maintain relationships with clients and carriers at the acquired firm.

One question a seller should ask, according to Mr. Wevodau, is whether the buyer intends to re-brand immediately, which could cause confusion for clients. This is especially important in cases where the purchaser gets an “earn out”–which pays them more if the company performs up to certain standards after it is acquired.

In general, Mr. Wevodau said his firm takes a “systemic approach” to examining potential acquisitions for clients.

He stressed the serious nature of looking at the usual financial exposures–concentration risk, loss experience, shock loss and the relationship with carriers–and the potential effect a deal could have on the acquired firm's contingency compensation agreements.

Integration, however, is “the biggest hurdle people just don't think about,” Mr. Wevodau said. There are some important issues in terms of technology, for example–what platform the acquired firm uses, and whether it is compatible with the one being used by the acquisition target.

Additionally, there are concerns about what he called a “culture clash” following a merger, explaining that people who are “unwilling to understand” what combining companies means can be a “deal breaker.”

Additionally, he said the “expectations of sellers are huge” at times, causing increasing difficulty in closing a deal.

Of course, culture clash can also undermine deals with smaller transition problems, especially if it involves issues such as vacation time or personnel, as people are absorbed into a larger firm. “We've had people willing to walk away because they didn't get a personal secretary,” Mr. Wevodau noted.

Once such issues are identified, agencies move onto the “second date” phase of an acquisition, as the company sizes up the ultimate value of a deal, Mr. Wevodau said.

“You really need to have an understanding of the overall value of the business,” he said, meaning that there is more to an agency than simply the bottom line. “It's not an exact science,” he said. “Our business is riddled with goodwill and intangibles.”