Hopefully you all had a wonderful holiday season, and are back to work energized and ready to tackle the many important decisions that await you.
The political and economic climates dictate that we will be operating in a constant state of flux for at least the next 18 months. The national economy continues to experience a rolling recession that impacts various industries at different points in time. And the current White House, Congress and the federal courts are all on a collision course to straighten out the Patient Protection and Affordable Care Act, if that's at all possible and whatever that may mean.
So as we have been saying in this column for quite some time, we all need to be optimally flexible, plan for multiple business contingencies, and reinvent our business practices to deliver more client value.
Crossroads
In last month's article, we observed that many of you are headlong into thinking strategically about your business opportunities over the next three to five years.
However, we also observed that a number of you are well beyond this point in life and you are not prepared to commit the time, energy, emotion and capital to reinvent your business at this stage.
Consequently, a number of you are beginning to contemplate a merger or sale of your business.
Last month, we addressed a number of reasons to consider a merger or sale.
This month, we'd like to provide some more specific direction and commentary to those that may be in this position right now. Perhaps mentally and emotionally you are not quite there in terms of making a decision just yet.
Where should you start?
Invariably the best place to start is with an honest assessment of the strengths and weaknesses of your business today. Only you are likely to really know where the gaps in your firm's capabilities exist and how to bridge those gaps.
And be honest with yourself. If organizational objectivity is difficult to achieve, then seek the assistance of a knowledgeable, professional business adviser.
Who should you consider as an ideal merger candidate? Selecting the best partner requires exploring the attributes of an ideal merger candidate.
The strengths and opportunity areas of your business will determine who the ideal candidate will be.
Evaluating potential candidates for a business merger is about finding business partners that have complementary practices. That way both businesses benefit from not having to spend time or money on building a new entity.
An ideal merger candidate would possess some or all of the following characteristics:
* synergistic or complementary domain expertise
* carrier relationships (preferably not duplicative)
* compatible technological capabilities
* new sales channels or markets
* compatible management style, business model, structure and corporate culture
* shared vision for the future of the business
One place to start is with firms that you already know, whether they might be friendly competitors or businesses that may have some synergies with your own practice.
Do you market complementary product sets? Do you serve different markets? Does each team possess expertise in a different business discipline? And do your strengths and weaknesses complement each other?
Having the same weaknesses could be a formula for disaster.
Perhaps the partnering firm has a desirable proprietary technology that would improve efficiencies or facilitate the opening of a new sales channel. Or it could be that both firms do not have much management bench strength; however, the combined entity might be quite strong and multi-faceted with great domain expertise.
Are the business models, marketing strategies, compensation plans, producer contracts and corporate cultures compatible? If they are not compatible, what can be done about it?
Business plan
As we have previously mentioned, mergers rarely fail because of any imprecision in the relative valuations of the respective merger candidates. Most failures result from poorly defined roles and responsibilities; the incompatibility of the principals; the lack of a shared vision for success; or no clearly defined, post-merger implementation plan.
Let's discuss the last point in greater detail.
First of all, have the principals even thought about business life post-merger? Presumably there are sound strategic reasons for the merger transaction and all parties have a shared vision. But have they thought through all the tactical and operational issues that need to be dealt with?
Is there a written plan that all parties have agreed to that details how business will be conducted by the merged entity? Does it provide specifics, including:
* roles and responsibilities, including leadership assignments
* elimination of redundant functions and expenses
* benchmarking or metrics for measuring progress
* technology integration
* timelines
* personal objectives, accountability and financial incentives
* definitions for success
The reality is that a business plan or operating roadmap for the new entity is really what is required.
After all, the new larger and more diverse entity never conducted business as a business before. Having a cogent plan also will help minimize stress when there are bumps in the road.
Now is the time for some dispassionate, logical and critical thinking. Presumably all the requisite expertise is resident in the entity. But how it is organized and managed will dictate its future success.
It's all about the execution.
Valuation
You need to also realistically consider what your business is worth as a starting point for any discussions with third parties.
In the chart, "Components of Market Value" (p. 22) we have attempted to provide a simplified graphic to assist you in considering the elements that comprise asset value.
The starting point is Adjusted Net Cash Flow, including "put-backs" for personal preference items.
Another element is your client retention and the value of your renewal business. High-growth firms are awarded a "premium" in terms of their valuation. You should be thinking double-digit compounded growth if you expect to command a premium to market value in any merger discussions.
And finally there is the Enterprise Value, which takes into consideration certain intangibles like your brand, goodwill, strategic competitive advantages, proprietary products or technologies, and other critical differentiators.
Recognize that there is the potential for a "valuation gap" to exist. What you think your business is worth needs to be realistic and defensible. And the same is true for any potential merger candidates and their expectations about the perceived value of their business.
So if you have the urge to merge, think strategically, and plan for success. Next month we'll discuss the merger process itself.
Kwicien is managing partner at Baltimore-based Daymark Advisors. He can be reached at
