Published in Insurance Age 05 May 2011
Link to original article: http://www.insuranceage.co.uk/insurance-age/opinion/2068235/acquisitions-price-wrong
Paul Anscombe makes some very interesting points in this Insurance Age article which mirror our experience.
Adequate preparation, a realistic appreciation of value and a degree of objectivity are key to getting the right deal. There are many buyers out there and an equal number of acquisition models to choose from - and unlike buying most other things, it is the buyer who sets the price in this case. An insurance business is genuinely only worth what a buyer will pay for it. Each buyer has its own model for uplifting the book of business once they've bought it - so the business has a different value to each. [John Mitchell]
"As a broker who has made acquisitions in the past and fully intends to do so in the future, I am often staggered by sellers’ expectations about the value of their business in the current climate. The big turnover-related multiples of years gone by are still quoted by sellers, even when their profitability is low or non-existent.
Some, after realising that the true market value is a fraction of their target price, decide not to sell now in the belief that “the good times are just around the corner” and that the ‘crazy’ prices will come back. I just do not agree with this. With funding issues persisting, insurers no longer ‘rolling over’ to pay enhanced earnings and the soft market continuing, pricing now needs to be increasingly linked to sustainable profitability rather than turnover. Some larger acquirers have bought businesses where they are very unlikely to ever recover their investment but, for most of us, we do need to show a return.
It is amazing how so few brokers adequately prepare their businesses for a sale. This should start at least three years prior to the sale – ideally longer. Professional help is readily available to identify objectives, potential purchasers and to plan communication with staff and clients to keep them ‘on-side’.
I have met with potential sellers who are clearly struggling with compliance issues, do not maintain proper staff files, do not have a clear insurer strategy and desperately need to improve their agency records. With some planning and forethought, a number of these issues can be addressed to help encourage purchasers to pay the best price possible.
The other big obstacle is that, for some owner-managed businesses, they are too close to the business to objectively negotiate the price. The firm they have built up over many years is more than just a company. It is an extension of their family, with staff and clients often becoming lifetime friends. Therefore, any negative aspect of a discussion can be regarded as a personal criticism.
What frustrates me most are brokers who want the highest multiple price and the least change to their business. Common sense dictates that a higher price generally equates to greater change. What buyers try to do is find a balance between retaining the good and changing areas which need improvement.
The bottom line for me is that sellers need to find a way of getting the emotion out of the sale process. It takes objective planning, preparation and clarity of what they want to achieve in the sale process for themselves, their staff and their clients. If the above are addressed adequately then the price takes care of itself".
Paul Anscombe, MD, James Hallam
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