This post is part of a series sponsored by AgentSync.
While the pandemic has cooled M&A activity in the insurance market, all signs point to a booming M&A market next year. If you’re in the position to evaluate (or be evaluated!) for an M&A, don’t leave compliance controls out of the mix.
At AgentSync, we’re not lawyers or accountants, so we don’t plan to go into any depth about the legality or finances of insurance M&A activity. However, we are addicted to compliance. And, to that end, we’re here to talk about where license compliance fits into your insurance M&A due diligence process (and the short answer is everywhere, it fits everywhere).
Priorities in M&A valuations
Most M&A due diligence checklists have 10 to 20 key areas to investigate both to assess a company’s fair market value and to determine the best option for an organizational merger. For the sake of brevity, we are condensing those priorities into five value groups.
These are by no means exhaustive, but these broad categories can help measure a wide range of issues that will ultimately require more microscopic analysis.
Prices
The most basic assessment of a company’s fair market value will be based on a few different values. Now, there is no straight answer on how to value a business: all calculations can only go so far, because the ultimate value of a business is what someone is willing to pay.
Lots of agencies sell based on a multiple of cash flow or earnings: they take a year’s worth of commissions and other income, subtract the cost of operations and taxes and everything, and then multiply the leftover earnings to arrive at to your “number”.
It is also common to use gross earnings before interest, taxes, depreciation, and amortization (EBITDA) to determine market value.
However, all of these have limitations. What a company did in terms of sales this year does not mean the same thing will happen next year: Hopefully this is a lesson we all learned in the pandemic!
Product
When we talk about product, we mean the fit of the product to the market, the realities of supply and demand, intellectual property and ownership, and even business reputation.
Whether a company has anything worth acquiring in the first place is a large part of the calculation when determining a company’s value or intrinsic risk.
Of course, from a compliance perspective, if an insurance product is being marketed by people who aren’t properly licensed, even if it’s a good product, you may still be at risk with your claims.
processes
What controls are in place in your insurance business? Processes are where we start to get into the “soft” parts of evaluating a business. But these soft parts of the business are where the rubber really comes out, so to speak.
For example, does a company have a marketing funnel that will deliver leads day after day? Are there strong channels for empowering employees to act like owners, or is it a business engine that relies solely on leadership for inspiration and advancement?
When it comes to compliance, it is important to assess the processes for onboarding producers (whether independent or employed) and maintaining license compliance. For example, is there a single person who has all the necessary knowledge in his head? Are there technologies that maintain this? Is it a manual process, riddled with errors?
A company’s processes and procedures are crucial to understanding whether an agency or carrier is a one-trick pony or progress machine.
People
Culture fit is king in M&A, and if you’re doing a risk management assessment, the way you assess culture is in people. If an organization has hundreds of employees, do they have a culture that enables success? Do they embrace positive changes? If your target has a smaller staff, are all the right people in the right places? Is there an overemphasis on leadership?
The typical pyramid of people can be a successful model, or it can be a bottleneck in decision making. Understanding what is at stake for a given organization is key to assessing people and culture.
Also, where is the cultural emphasis on compliance? When assessing compliance, it can be helpful to enter National Producer Numbers (NPNs) for insurance producers contracted through NIPR and get an easy assessment of the data, such as whether they are up to date on relevant licenses and appointments, or whether they have reported of actions against them in various states. Understanding whether your potential acquisition has a history of ignoring compliance can be key to assessing its value and understanding how easily it will find a suitable culture.
Potential
Is a business operating at its peak? Maybe you just want to get a streamlined boat that’s ready to launch forward. Maybe you are willing to invest in a house that needs fixing. Regardless, understanding how much room for improvement a potential acquisition has is key to agreeing on business value.
part of a the potential of the business is in its technology. Are you working with external providers that add value and efficiency? Are any technology partners really posing a risk due to lax data privacy standards? Understand which technology solutions add value and which dilute it.
M&A compliance and insurance
As we see the consolidation of the insurance industry, companies that are acquiring and being acquired will have a laundry list of considerations before agreeing to any deal. And it’s only fair that compliance is by no means the only factor by which to evaluate a business.
However, if you’ll excuse me for a moment of self-aggrandizement, we’ll make an argument: The fact that an operator, agency, or MGA has been able to maintain compliance standards is probably a good metric for diagnosing other underlying issues.
Rarely do compliance issues come to light without accompanying issues. Business entities or carriers with poor customer service, struggling internal cultures, or troubled growth cycles often struggled to maintain compliance hygiene long before other issues became public.
Conversely, if you are a business looking to be acquired, your business valuation can only be helped by demonstrating that you have an efficient workforce of growers who can be licensed, designated, and ready to sell at the drop of a hat. eyes.
If you’re looking for a way to keep up in a heated environment of M&A activity, put compliance first and get AgentSync Manage.
Topics
Fusions and acquisitions
