By Daniel B. Price

Over the last several months we outlined what we believe to be the ten most important rules for agency sellers to follow as they walk through the selling process.  This month we switch gears and begin a discussion of what we believe to be the most important items for buyers to keep in mind as they pursue growth through acquisitions.

While one cannot predict with certainty the problems that will arise in future M&A transactions, past agency acquisitions provide valuable lessons regarding common pitfalls to avoid. Many great agencies have been built through successful acquisitions, but many others have struggled because of failed or poor acquisitions. While most agency owners start off with good intentions during their acquisition process, history has taught us some simple, yet valuable insights as to why acquisitions fail. Here, then to refresh your memories is again our top 10 list of important rules for buyers followed by a brief discussion of the first two rules:

Important Rules for Agency Buyers:
1) Clearly Define the Acquisition Strategy
2) Establish Pricing Rationale and Metrics
3) Be Flexible and Creative
4) Give Due Diligence Its Just Do
5) Engage Professional Advisors
6) It is Okay to Walk Away
7) Remember that Buying is Selling
8) Don’t Overestimate Synergistic Value
9) Realize that Things Will Change
10) Thinking the Deal is Done

1. Clearly Define the Acquisition Strategy. To complete a successful acquisition, a buyer must first develop a comprehensive acquisition strategy. It is essential for buyers to identify key attributes that they require be present in a potential transaction partner.  Taking the time to do this in advance can save significant time and money in the future and provide the template and guiding principles for strategy. The acquisition strategy should include such basic items as strategic fit, corporate culture, financial criteria, management strength, geographic markets and transaction structure.

2. Establish Pricing Rationale and Metrics. Buyers must be prepared to discuss and explain their pricing rationale. A buyer's ability to effectively communicate and negotiate based on a sound financial model is often a key factor in moving past pricing stalemates. Arguing higher versus lower is a no-win situation. Buyers must be prepared to discuss differences between the offer price versus a seller’s perceived market value.

The takeaway for buyers from these initial two rules is that careful upfront planning and strategizing will greatly reduce the time it takes to identify and screen prospective transaction partners and ultimately increase ones chances for success.  Establishing pricing rational and parameters helps to keep pricing discussions grounded and often allows buyers to recognize lofty, and often times insurmountable, seller expectations right from the onset.

Daniel B. Price is Vice President of Hales & Company, Inc.