As a brokerage owner, perhaps mentally and emotionally you are not quite there in terms of making a decision just yet, but you are considering a sale or a merger. But 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 is about finding business partners that have complementary practices. This 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

Also see:The year in commentary: Broker commission losses and the future of healthcare.”

One place to start is 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? Perhaps equally important is when they are not compatible, what will be done about it?

Life after merger
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. It is this latter point that we want to discuss in some more 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:


Slideshow
Top 10 EBA stories of 2016
Two types of stories dominated the attention of the Employee Benefit Adviser's audience in 2016: the details hidden inside benefit plans and how to implement them.
  • 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, more diverse entity never conducted business as a business before. Having a cogent plan will also help to minimize stress during those times, which undoubtedly will occur, 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. And if you don’t know where you are going, any road will get you there.
You need to also realistically consider what your business is worth as a starting point for any discussions with third parties. The starting point is adjusted net free 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 that 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.

Register or login for access to this item and much more

All Employee Benefit Adviser content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access

Jack Kwicien

Jack Kwicien

Kwicien co-founded Daymark Advisors LLC, a Baltimore-based consulting and advisory services firm in 2001.