Apr 122015

Art of Due Diligence

Due Diligence  -  And The Independent Insurance Agency

In every merger, acquisition or investment transaction due diligence is not just important, it is critical. As a seller anticipate it – your preparation can mean fewer irritations and often increased value.  As a buyer, don’t take short cuts – the devil is in the details.

Here then are some observations for those undertaking due diligence relative to Independent Insurance Agency transactions.

Due Diligence Is A Two-Sided Coin 

Sellers must expect that a diligent Buyer is going to ask detailed questions about your personal “wish list” as well as your agency’s financial condition, operations and personnel practices.   Recognizing that a quality Buyer is likely to be thorough, Sellers should carefully evaluate their agency’s strengths and weaknesses, take all steps possible to put their best foot forward and have supportable answers ready for those obvious questions that are sure to come.

Buyers must expect that a diligent Seller is going to ask detailed questions about your financial capacity, credit worthiness and, often most importantly, your intentions for him and the agency.

Due Diligence Requires Forthrightness On The Part Of Both Parties

Sellers should accept the fact that the foundation for their financial success and reputation is likely to have a few “cracks.”  Hiding them or fudging answers will not only erode a buyer’s confidence but will certainly result in diminished pricing.

It is true that almost any transaction can be consummated without the Buyer disclosing his post-closing plan for the agency as a whole or for individual members specifically. Nonetheless, a failure to meet minimum and fair disclosure, or efforts that mislead a Seller or his key people will lead to disappointment post-closing and not infrequently to efforts that undermine, in subtle ways, the very success of the transaction.

Financial Due Diligence

The great majority of Independent Insurance Agencies retain independent accountants to prepare annual compiled financial statements usually based on output from one of the commercial systems.  Thus, while buyers will see a GAAP presentation it will often reflect subjective, accounting decisions.  Buyer Beware!  Careful due diligence requires an understanding of what expenses are in each ledger account, however clearly it might be labeled, as well as when they got there. Lacking a detailed understanding of unusual or one-time revenues and expenses makes calculations of future cash flows virtually impossible. In the case of overdue receivables it is particularly important not only to know the agency’s history of overdue items as an insight into its collection practices but to know “who” owes the money as an insight into any accommodation practices for large or special accounts.

In those instances where the Balance Sheet identifies transactions with owners and / or employees, it is critical to understand the implications of each as they may identify an owner’s motivation for selling and/or employment practices that may not be acceptable to an investor

Operational Due Diligence

The strengths and weaknesses of an Independent Insurance Agency are usually disclosed during a review of its operations.  Thus, such items as: the quality of company representation; underwriting results; market and account penetration; sources of sales, employee efficiency and type of systems come to light.

Often overlooked, however, is the role and influence of the owner in generating new business and maintaining existing accounts.  It is not really surprising that the accounts of smaller agencies often reflect the age and actions of the owner. Reaching an age or a desire to retire, many owners settle into a comfortable existence. With a minimum sales effort price and coverage increases can result in modest growth while the underlying accounts age with the owner signifying trouble for the acquirer.

Also of significance is the source of new sales and the confidence that these sources can be maintained by a new owner. If business is brought to the agency by outsiders then the issue of “ownership” of the expirations becomes critical.

Personnel Due Diligence

The attention span of Buyers of Independent Insurance Agencies is too often limited to two personnel areas:

  • Identification of producers and sources of sales; and,
  • The qualifications of key underwriting and administration personnel.

Overemphasis on these admittedly important areas regularly results in inattention to other significant, but more subtle issues.

What is the Owner’s real reason for selling?  The answer may affect how to price the transaction and even how the seller might be a part of the transition and post-closing plan.

Another often overlooked area is the Seller’s philosophy regarding compensation, titles and “perks.”  Compensation levels for the Seller’s key people may be inconsistent with what the Buyer pays his key people and producers.  Similarly, flexible working hours, bonus programs, company cars and related expenses may give rise to issues that are not easily, and occasionally impossible, to resolve.

Successful Due Diligence Supports Post- Acquisition Planning

Often overlooked completely and regularly given short shrift is the development of a post-closing plan. Successful due diligence should enable the Buyer to effect the change of control and the merger of the two businesses in the most effective fashion.  Generally, Buyers will have identified opportunities for improving revenues and margins and identified personnel with potential for increased responsibilities, but surprisingly, even the most active Buyers regularly fail to assign specific responsibility for managing, tracking and reporting on the implementation of the post-acquisition plan.


If Buyers and Sellers are going to minimize post-closing “surprises” there are no short cuts to an effective “two-sided” due diligence process.

Feb 102015

Mediation – The Preferred Way To Resolve Many Civil Disputes

Has The Time Come To Stress The Value Of Mediation Over Arbitration? -

Two decades ago, the following statement appeared in the Appraisal Journal.

“Clogged courts and escalating litigation costs have made arbitration as a solution for civil disputes and claims of conflict more necessary than ever before.”[1]

Today, with arbitration clauses routinely included in most commercial contracts, it has become the preferred alternative for dispute resolution. Unfortunately, in this writer’s experience, the increase in arbitration has given rise to a severe erosion of its intended benefits. Arbitration clauses ignore mediation and dictate a standard, comprehensive arbitration process. Judges and arbitrators, unwilling to circumscribe the rights of the parties, regularly allow the attorneys to dictate the process. Given the opportunity, attorneys prepare for Arbitration as though they are going to a formal trial. The discovery process is as thorough as for any trial. A plethora of documents are demanded, copied and reviewed. Witnesses are identified, prepped and presented. Experts are retained and asked to prepare comprehensive reports. The result, the expected benefits, reduced cost and diminished time, are eroded, if not lost entirely.

As someone who has experienced both arbitration and mediation from all aspects, I believe that encouraging a two-step pretrial process that begins with the increased use of Mediation followed by Arbitration, if necessary, would restore the benefits party- principals desire.

With today’s courts overly burdened and the litigation process more costly than ever, possibly it is time to recognize the advantages of mediation over arbitration for many civil disputes.

  • Mediation and arbitration share a common goal – resolution of a dispute.
  • Mediation generally results in a mutually acceptable result. Arbitration results in a final, usually binding decision cast in terms related to the pleadings. Mediation, though seldom binding, often results in finality based on a solution tailored by, and to the requirements of, the parties.
  • Mediation generally requires little discovery. The parties know their position and have established reasonably specific demands.
  • The mediation process is more direct. Mediation casts the principle decision makers before each other. Each is encouraged to state his/her own case as they see it, exempt from legalese and, often, with all the emotion and intensity their claim has engendered.  With experienced guidance, often provided in private sessions, this “clearing the air,” aids in a better understanding of the opposing party’s position, a first step toward a mutually acceptable solution.
  • The mediation process is more personal and flexible.  Being a process that accentuates the role of the principals, the experienced mediator will usually impose few formal constraints beyond the request for civility.  In many mediations, typically family disputes, attorneys may not even be present.
  • Mediation is usually conducted and often successfully concluded in one day.
  • The cost of mediation is usually minimal.  Conducted in a single day, before a single mediator, generally with few, if any, witnesses, costs to the parties are substantially minimized.
  • With a result tailored to what suits the parties the likelihood of a resolution that diminishes angst and aids in preserving the business relationship is increased.


Unfortunately, parties to a civil conflict are seldom aware of mediation as an available, potentially beneficial alternative.  Furthermore, attorneys, trained in formal litigation requirements and process, are inclined to feel that arbitration better serves their obligation to their client and, of course in doing so, increases their billable hours.

Nonetheless, given the escalating costs of arbitration, the expanded base of trained mediators and the success of the mediation process, it is time to consider the merits of mediation as a valuable step prior to arbitration.

[1].  Jerome N. Black, “The Process of Arbitration.”  The Appraisal Journal, April 1993, pp. 234-38    Quoted more extensively in Valuing A Business, fifth edition, Shannon Pratt, pp 1054

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.

[1] Shakespeare, Hamlet Act I, Scene 3

Dec 162014

Acquiring An Insurance Agency?

Ten Points That Contribute To a Successful Acquisition -


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.


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 →