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Jan 222015

The Art Of Writing An Evaluation Report

WHY EXPERT REPORTS OFTEN DISAPPOINT

While it appears that few valuation reports are denied outright, many are subject to such obvious issues that they fail to be convincing to the court. Too often reports are diminished in their worth for reasons that should have been obvious in peer review, to supporting counsel or any lay reader.

The devil hides in the simple details, and the devil can cause considerable embarrassment.

Failure to:

  • Comply with or distinguish local law.
  • Comply with local court requirements such as format, binding, timing and distribution.
  • Comply with applicable professional standards.
  • Properly identify the subject of the valuation. Surprisingly, the subject’s legal name is often cited incorrectly and subsidiary assets not clearly identified.
  • Identify the correct valuation date or explain why the selected date is reasonable.
  • Offer a clear conclusion with simple supporting commentary “up front.”
  • Accurately cite external sources of data that were relied upon.
  • Recognize that grandiose credentials often serve to emphasize that the expert has little, if any, actual experience in dealing with the business type, industry or issues involved.
  • Sign or evidence who prepared the report.

“And this above all else,”[1] EXPLAIN!! EXPLAIN!! EXPLAIN!!

  • Explain your process. The source and reliability of financial data and how acquired; site visit or lack thereof; management discussions and their input; pro forma adjustments, if any.
  • Explain the reasons for the selection or rejection of usual methodologies. Courts are expecting valuation opinions to be based on generally accepted valuation methodologies. In individual situations some are more important than others. In many cases, some aren’t even applicable.
  • Explain how the target compares to others in its industry and the economic and competitive environment that existed at or around the valuation date. For a general list of factors see Rev. Rul. 59-60. Should you have your own list of risk factors explain the relative importance of each item. Such lists and references are valuable because they provide experts with the means to explain rationally the attributes they used and the weights they assigned.
  • Explain the basis for all assumptions. Do not make it difficult to follow how assumptions are developed and used. This is particularly important: when developing a Capital Asset Pricing Model; determining premia or discounts; distinguishing corporate and personal goodwill, and weighting the results of alternative valuation methodologies.
  • Explain the relevance of third party, commercial data sources. A number of highly regarded services that provide useful data are available to practitioners. However, when used, a practitioner should explain why the data is relevant to this specific assignment. Too often, general data is just that, too general and of little relevance to the subject entity.

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[1] Shakespeare, Hamlet Act I, Scene 3

Dec 162014

ACQUIRING AN INSURANCE AGENCY?

Ten Points That Contribute To a Successful Acquisition

Strategic

1.  Look for the right targets.

An acquirer is in the best position to offer competitive pricing when it can merge most, if not all, of the acquired business.  This involves two separate/distinct valuation Issues – What is the target worth as a stand-alone entity? and, What is it worth to you, the acquirer?  The difference is your negotiating space so, as an acquirer, you have to determine both numbers.

2.  Keep in mind that both sides are selling something.

The seller is striving to put his best foot forward in order to get the best deal possible.  While this involves “the price,” it almost always includes a number of issues of personal importance –items of equal, and occasionally even more important than, “the price.”  So, listen and examine carefully.

As a buyer, you too are selling.  Obviously you have strengths but the challenge is to identify and present those strengths that are important to the target. – Tailor your presentation to the specific target.  What does he/she really want?  Can you determine his/her “wish list” and respond to it?

Due Diligence

3.  NEVER ignore the Balance Sheet.

Even if you are “ONLY buying the target’s assets” do not ignore its balance sheet.  The balance sheet of every privately held business can tell you a lot about the agency’s culture. Such things as the Owner’s style; special treatment of employees; his/her sales philosophy.  For example; i) Do Accounts Receivable indicate that he is financing his major accounts? You want to know whoowes the agency not simply how much; ii) Can key employees borrow money for special needs often on favorable terms? Are you willing to continue these and other personnel practices?

4.  Know what is in each account.

The format of all agency financial statements is somewhat similar.  The substance can vary dramatically.  You may know what is in each account in your agency but don’t presume that income and expense items appear similarly in your target’s statements.  If you are going to develop an accurate assessment of both the stand-alone value of your target and your own expected benefits from acquisition and merger, you need to know what is in each account and how and when it gets posted there.

Integration Planning

Once a deal is in sight, start planning for the post-closing period.

5.  Many acquirers actually hurt their chances for success by not spending as much time on planning for the post-closing integration as on negotiating price and terms.  Critical time and cost is involved in each of the following areas:

  • Resolving differences in personnel practices especially compensation, titles and reporting relationships.
  • Who, How and When will you contact Key accounts; all accounts?
  • Who will lead the merging of all financial and operating data processing Systems?

6.  Prior to the closing it is often important to initiate fulfilment of certain important requirements – particularly if the transaction is being structured as a purchase of assets.   Will new non-competition /non-solicitation covenants be required?  Will new contracts with markets be required? If several staff are to be terminated, who and when will this be accomplished?

Carefully consider the Terms of your deal not just the Price.

Strangely, many buyers and sellers are unaware of the significant differences among Value, Price and Terms.  Understanding the differences can have a substantial effect on how the negotiations proceed, how the parties assess “fairness” and the ultimate benefits to all concerned.

7.  Both the Acquirer and the Seller will have their opinion as to “Value.”  To be successful in “selling” his opinion, it is important that an acquirer be able to support it based on an assessment of the seller’s financial and operating results.  The more carefully this opinion has been developed the more respectful will be the seller’s response.

 8.  A fair price isn’t fair if the TERMS don’t fit the Buyer and the Seller.

Not only must the terms be fair there must be structures and covenants in place to provide assurance that all parties are required to comply. While many Covenants will be standard each transaction has its own nuances.  It is critical that the covenants be specific to the issues of the transaction

Professional Counsel

The selection of experienced counsel – tax, legal and insurance is frequently critical to the success of a transaction.

9.  Too often what appears be a fair price turns out to be a disappointment because of the tax structure of the transaction.  Similarly, a well-conceived, contingent pricing structure can turn into a nightmare because counsel didn’t know the differences among revenues and commissions; base commissions and contingent commissions; P&C commissions compared to life insurance commissions.

Closing

10. Make it an important occasion.

The employees of both your agency and the acquired agency will have a wealth of questions and personal concerns.  Be prepared. Don’t wait to meet with employees (yours and theirs); Key accounts; and, key markets.

Try my Free Website Business Valuation Estimator

Nov 112014

Selling Your Agency? – Ten Points To Consider

Selling Your Agency? – Ten Points To Consider

1.  Prepare a personal “WISH LIST.”

Know why you are selling and what you want.  Don’t be hesitant about being selfish but be prepared to support your wishes.

2.  Recognize that you will need experienced advice.

Whatever the size of your agency, you will have technical insurance, tax and legal issues.  You will need help, but make sure that the advisors you rely on have actual insurance agency transaction experience.

3.  Look Professional – Prepare a presentation document

Have all your key information (financials, personnel information, key accounts, etc.) in one place – preferably a professional-looking document.

4.  Recognize deficiencies as well as strengths.

If you can’t fix your deficiencies then have a plausible explanation for them but DO NOT HIDE THEM.

5.  Find the right buyer.

The right buyer will mean the highest price and the best terms.  You will recognize him/her as needing something you have and it will likely be an agency that can effect a merger of offices on a mutually beneficial basis.

6.  Protect your future options.

Even if you are “fed-up and just want out” your current expectations and attitude are likely to change.  Don’t close the door completely.

7.  Have a transition plan for your key accounts.

A good transaction should provide benefits to your clients. Unless substantial reasons for secrecy exist then before the news becomes public make them a partner in the transaction.

8.  Have a transition plan for your key employees.

Disappointed/disgruntled employees can upset a transaction.  Consider each employee on an individual basis.

9.  Cash may not be the best way to assure security of payment

Most acquirers are hesitant to pay out a lot of cash based on expectations.  As a result, expecting an abundance of cash will likely diminish your purchase price.

10. Contingent or Incentive-based Compensation

In many instances these can be devised to enhance the purchase price.  If you are accepting future payments – even under an incentive plan, then you may be financing the purchase price and entitled to interest.

Finally, About Value:

Understand the difference between value, price and terms. A few, very few, agencies are worth two times their commissions.  If you believe yours is one of them then be ready to support your view with reasonable arguments and facts – often a major reason for retaining a professional adviser.

Try my Free Website Business Valuation Estimator

Jul 082013

When to Retain Your Insurance Expert Witness

When is the Best Time to Retain Your “Expert”?

A critical decision when Insurance Agency Valuation and Insurance Company issues are involved.

Experienced Insurance Expert - excerpt from text. Moat Associates.A recent internet discussion among international attorneys, accountants and experts contributed a number of answers to this question. As one might expect, the predominant answer was, “As Soon As Possible.” Continue Reading →

Dec 152011

When Hiring an Insurance Valuation Expert

What lawyers should want when hiring an insurance valuation expert or arbitrator

Too often when interviewing a prospective “expert” lawyers are led astray by the insurance executive who “has worked in the insurance business for over 25 years” or by the CPA who “has testified on many valuations.” BE AWARE – neither may be up to the task. As an attorney going to trial on an insurance valuation matter you want to know your prospective expert’s response to at least the following questions.

  • How many times have you testified on an insurance (agency or company) valuation?
  • Of those times, what percentage was for the plaintiff and what percentage was for the defendant?
  • Have you ever been excluded by a court? If so, why?
  • Have you ever been appointed by the court as an independent expert?
  • What percent of your income is based on expert testimony on insurance valuation issues?

Adapted from “Factors to Consider When Hiring an Expert,” an article by Donald May (Marks Paneth & Shron LLP):

Nov 222011

How to Value Your Insurance Agency Business

Using DCM’s  Free Website Business Valuation Estimator

Moat Associates has created a business valuation tool  that can be used to estimate the value an independent insurance agency, whether large or small.

  • Do you need a valuation estimate for legal or perpetuation planning?
  • Are you curious about the value of your insurance agency in today’s market?
  • Are you wondering about how to possibly value and price your insurance agency for sale?
  • Or are you thinking about buying another agency and want to get an idea of its value before planning an offer?

Continue Reading →

Oct 162011

Business Loans for the Independent Insurance Agent – Part 2

This is the second part of a two part series. Don’t miss part 1:Business Loans for the Independent Insurance Agent

Spotting Trouble on the Horizon

When Lending Implement a Regular, Knowledgeable Follow Up

Inherent in the establishment of appropriate covenants and conditions should be acceptance of regular financial and operational reviews. These might be as frequent as quarterly in marginal loan situations or when trouble has been spotted. Such reviews should include not just the agency’s financial results but at least annually the owner’s personal financials whether or not personal assets have been pledged against the loan. Continue Reading →

Oct 112011

Business Loans for the Independent Insurance Agent – Part 1

An Introduction to Business Lending Opportunities and Observations on Workout Strategies (if needed)

The independent insurance agency business has been, is, and should continue to be, an excellent source of loans for commercial banks, insurance companies and other lending institutions. Blessed by an increasing base of prospects, an economy that demands insurance, social and economic inflation that increases premiums the insurance industry has seen a half a century of uninterrupted growth in premiums.

Compensated by commissions based on these premiums the independent agent has enjoyed a unique opportunity for growth in both his/her agency’s income and its value. While the last twenty years have seen marked shrinkage in the number of independent insurance agencies, the primary cause has been a continuing pattern of mergers resulting in fewer but, overall, larger average sized agencies. Among insurance companies and industry experts this trend is expected to continue. It is this merger activity and the resulting larger agency that provides lenders with the opportunity to build a portfolio of highly profitable, mid-size ($500,000 to multi-million dollar) loans and insurance companies with the opportunity to access sources of larger premium sales. Continue Reading →

Sep 062011

Is Arbitration A Trap For The Unwary Insurance Agency?

A Reprint from MEALEY’S LITIGATION REPORT: Insurance Vol. 21, #13 February 6, 2007

Commentary

By Peter H. Bickford

[Editor’s Note: Peter H. Bickford is an independent counselor and arbitrator to the insurance and reinsurance markets, with particular focus on dispute resolution, solvency, regulatory, agency and operational issues. In addition to being a practicing attorney for over 30 years, he has been an officer of both a life insurance company and of a broker oriented property/casualty insurance and reinsurance facility with line responsibility for contract and claims operations. He is an ARIASUS. certified arbitrator and umpire.

Copyright 2007 by the author. Response articles to this commentary are welcome.]

Arbitration has been a recognized standard for resolving disputes in the insurance industry for centuries, evolving from the need for global commerce to be able to rely on standard business practices and the prompt resolution of disputes.1 Over the past several decades, arbitration has become the preferred means of resolving disputes between insurers and their reinsurers. In this period the number of full-time reinsurance arbitrators, along with the number of law firms, consultants, and other experts specializing in this field, has skyrocketed.2 The arbitration boom has also begun to take hold in other areas as well, such as between insurers and commercial insureds and between insurance companies and their agents, with many insurers now including an arbitration clause in their standard producer or agency agreements. However, this expansion of the arbitration process beyond the reinsurance arena has its critics, and creates special problems for agencies that need to be considered. In his excellent article on the commercial history of arbitration and insurance,3 Continue Reading →