Selling a business is one of the biggest decisions an owner will make. Often, it’s a very personal decision and a difficult one to make. The stakes are high, the dynamics are complex, and missteps can be costly. Acquirers are usually well-prepared with sophisticated information and negotiation strategies, which can put independent sellers at a disadvantage.
But once that decision is made, more important questions and decisions will follow. For insurance brokers and business owners who have spent years building their companies, the sale represents potentially the most significant financial transaction of their lives. Yet many owners consider navigating this complex process alone. An experienced investment banker (also referred to as an M&A advisor or consultant) is the best resource for navigating the mergers and acquisitions (M&A) process – ensuring owners will maximize the return on all those years of hard work.
The experience gap
The acquirers in this industry are far more experienced in the process of negotiations and dealmaking, some with dozens of transactions each year. For most owners, selling their firm will be probably the first and the last M&A deal they will experience. This fundamental imbalance creates a significant disadvantage for sellers who attempt to go it alone.
Data shows that firms with experienced representation receive more money in final transactions. In fact, a 2016 study conducted by Fairfield University titled “The Value of Middle Market Investment Bankers” found that when an investment banker oversaw the process, 50% of business owners received a final sale price higher than the initial sale price estimate.1
At a minimum, working with an experienced investment banker closes that experience gap and signals to the buyer universe that the seller is serious and can’t be taken advantage of.
The importance of data in M&A
Aside from experience, acquirers in this industry also have a data advantage. Most have access to real-time market data, tracked by their investment banking relationships and historical transactions. They have insights into valuation benchmarks and market trends. And many acquirers (especially serial acquirers) understand the value of this data and even advisory services, often purchasing data and hiring consultants during an M&A transaction.
The bottom line is – data is currency in M&A negotiations and is key for developing a strategy in the acquisition of a business. Fortunately, it works both ways. Data is also key for sellers in developing a strategy in the sale of their business. However, raw data alone doesn’t create value – the potential advantage lies in translating that data and applying it effectively.
An experienced investment banker will have access to similar (perhaps even better) industry data, be able to translate that data, and deliver insights into a strategy. That strategy includes benchmarking what has historically occurred in the market and what is important to acquirers (even specific acquirers). This knowledge and insight allows a seller to anticipate and address any concerns or objections a buyer might raise during negotiations. Data also helps set expectations and define value for the seller – so there are no surprises when going into negotiations with acquirers.
Adding value beyond the sale
Selling a business isn’t only about securing a deal. Maximizing value while protecting long-term stability should also be key focal points of the process. A knowledgeable, licensed investment banker, with experience in the seller’s industry niche, will help maximize the value of a business. They are most likely familiar with, and may already have professional relationships with, the relevant buyers. An experienced M&A advisory firm has a vast network of contacts and potential acquirers. They know these buyers, know what they are looking for, know their negotiating style, and know what their culture is like. It’s all about finding the best match for your business.
Expanding the buyer universe is key as competition drives better terms and conditions. Just like when you solicit multiple insurance rates from multiple carriers for your clients, you too should have an expert bring you several options from which to choose.
Navigating complex deal terms
Here’s how an advisor can enhance the selling process to secure the best deal for your business:
- Letter of Intent (LOI): Acquirers will create this document to outline the preliminary commitment to a sale and start the negotiation process. LOIs can be complicated and nuanced – no one should sign one without an advisor involved. An investment banker will ensure you get a fair LOI by confirming that the calculations are accurate, comparing other offers, and determining the general terms of the deal.
- Due diligence: Having an experienced consultant conduct a due diligence review of a business and a potential deal is about having someone who understands the steps in the process, understands the insurance industry and can provide unbiased assessments that both parties can trust. The due diligence process can expose potential pitfalls (i.e., culture clashes, HR issues, strategic misalignment, pro-forma disagreements), saving time down the road and avoiding a potential bad deal.
- Agreement of sale: This formal contract contains the provisions for the sale, including purchase price, terms and conditions, timing, payment terms, and more. It takes a team to create a strong formal contract. While the attorney has an important role, a good investment banker will provide crucial input on key business terms because they know the nuances of the insurance brokerage industry and can offer more specialized insight.
- Earnout terms: An earnout is a provision in the purchase agreement that allows the seller to receive additional payments based on the future performance of the acquired business. A good advisor stays involved, sometimes for years after the sale takes place. They’ll check the numbers, ensure accuracy, and follow-up on your payments post-sale.
Reducing stress and ensuring success
A lot of the selling process involves stressful or time-consuming tasks, like analyzing detailed financial reports, spending time on long phone calls, or pushing back on perceived unfair offers or transaction terms. The right advisor will remove stress and uncertainty and ensure the process runs smoothly and professionally.
They will also increase the likelihood of closing the transaction by guiding the seller for the length of the process: creating timelines, setting up calls, and firming deadlines. An investment banker is dedicated to closing the sale – and if a particular buyer can’t or won’t, they’ll try to find a better buyer.
A firm owner has worked hard building their business and this may be the most important financial decision of their life. Most people hire experts all the time to help them with much more low stakes decisions (i.e., financial advisors, accountants, realtors, attorneys) – why would anyone go it alone for such an important decision as selling a business?
Working with MarshBerry
At MarshBerry, our focus is helping firm owners maximize their value and being in control of their destiny – through market intelligence, peer exchange, and proprietary data. MarshBerry has the largest proprietary database of industry performance, which has been underwritten by acquirers in our respective niches; the largest repositories of LOIs across the industries; and a large collection of key legal points from industry-relevant past purchase agreements.
Learn more about how to improve your strategy and positioning as a seller by watching this MarshBerry FocalPoint webinar.