A concern was raised recently about whether or not a buyer should be able to interact with employees of the seller during the due diligence process of an M&A transaction.  My reaction is that it is generally unwise for the buyer to be allowed to interact with employees at least before financial due diligence is completed and the final terms of the deal have been set.  There are far too many issues that can arise even up through the later stages of a transaction.  Most agency owners have the business sense to foresee this as well so they are very guarded about even disclosing a potential transaction to employees until it is essentially “a done deal”.

Working regularly on both sides of the transaction, I can see both parties reasoning.  The buyer’s real concern is making sure that there aren’t any hidden landmines within the staff, particularly with key employees or producers that might revolt or create an exodus after the deal is closed.  While a buyer can only locate those landmines (and possibly call off the deal), it is the seller that has the ability to remove them and avoid personnel complications well in advance.  Below are five simple suggestions to help ensure a successful perpetuation, and smoother sale, of your insurance agency as it relates to the agency personnel.

1) Hire team players.  This one is easy.  Loyal employees will do what is best for the owner and their coworkers.   In my experience, the “problem children” during an M&A transaction are commonly individuals that wanted to be the perpetuation plan, OR successful producers that are looking for a financial payout themselves (i.e. both self-interested parties).

2) Execute employment and producer agreements.  Since people do change over time and even a good screening process can fail in weeding out the problem children, the second best defense is to put in place employment agreements that protect your interests in the business.  These should include clauses for confidentiality, non-solicitation, non-piracy, non-disclosure and, if possible, non-competition.  Seek the help of a business attorney and see if your state permits a transferability clause as well.  The agreements should be executed years before a sale.  Trying to get the employees to sign them becomes more challenging the longer they have been with the firm, so do it early and alleviate the future headache.  The last thing that you want is a key employee strong-arming you for money to sign an agreement shortly before closing.  Unfortunately, there are often some that will try.

3) Prepare the employees.  Start dropping hints about your plans in advance of discussions with buyers so that the employees are a little more psychologically prepared.  I had one client that did it very well to the point where his employees joked with him after the fact that “it was about time”.  You don’t necessarily want to let the cat out of the bag, but reactions are never good if the employees are completely blind-sided and caught off-guard as to your intentions.

4) Screen the buyer.  There are many buyers of independent insurance agencies so most agency owners have multiple options of who they can sell to.  Do your own due diligence on the buyer and avoid those that you foresee will upset the culture or don’t have the finances to overcome cash flow issues.  Some buyers are known for slash and burn cost-cutting tactics post-close, so seek to understand their integration strategy.  Many transactions also have an earn-out or a seller-financed portion, so it may be in your financial interest to know who you are dealing with.

5) Sell the employees on the buyer.  Creating goodwill with the employees for the buyer does work.  Keep a positive attitude and discuss additional benefits the new opportunity will create for them.  If you have good rapport with your employees, then assure them that you will be around through a transitional period.  Be a calming force to their anxieties.

6) Help through the transition.  The first 30-60 days will require quite a bit of work on the part of the buyer between notifying the clients, transferring the contracts and banking information, and familiarizing themselves with the employees and systems.  Even if you are retiring, make yourself available to assist.  It doesn’t have to be a full time job but work with the buyer to smooth out the transition of ownership.  A little extra effort will go a long way to creating a successful perpetuation.

This is not an all-inclusive list but hopefully provides you with a few things to consider as you begin to develop your exit strategy.

Posted by:  Michael Mensch, CBI, M&AMI and Managing Partner