In order to avoid a failed insurance agency acquisition we put together the following list of items to consider and develop a plan of action to overcome these potential obstacles:
Complex operations. In business, there are no extra style points for degree of difficulty. Simple is better. Here are a few examples of what we mean by complex operations. These included: a) the complexity of combining multiple organizations in a roll-up strategy, b) complexity of acquiring and maintaining multiple offices, c) geographic distance between important sites, and d) specific technical expertise required for specialized services.
Low profit margin. This can be defined as a profit margin below 15%, or simply a gross margin below the industry average. The corollary of this is true as well: it is so much easier to be successful in an agency that has a high profit margin. This is because you can often adjust the other expenses if necessary, and a high gross margin gives you the ability to invest in sales and marketing which can often be a key lever for smaller agencies.
Execution failure. This often goes hand-in-hand with complex operations. In many cases, the new owner did not master the operations of the agency quickly enough.
Customer concentration. This is often defined as one customer representing more than 20% of revenue. In my opinion, this is the classic situation to avoid for all investors. It is simply inevitable that large customers will modify their strategy, and this often happens at the most inopportune time for your business. There is a time to take these risks, but investors need to have their eyes wide open to this and know that they are gambling when they do so.
Restrictive capital structure. In our research, the companies that had debt at more than 60% of their total capital ran into more problems. Leverage is a great tool to be used sparingly, but it has also been described as “a knife attached to the steering wheel” so that any slight bump in the road can be deadly.
Conflict with previous owner. With smaller agencies, it is easier to see how previous owners can meddle (even with good intentions) or command influence beyond what is healthy.
Inability to retain or hire adequate talent. This is especially true when an agency has one key producer.