HIRE YOUR NEXT ACQUISITION:  You may be buying the firm, but the hired help comes with it.  Check under the hood and be sure you get what you pay for.

Leader's Edge, October 2006
Author:  Robert J. Lieblein

FAST FOCUS

• A management team can make or break the success of an acquisition.

• Use the same rigor in evaluating the seller’s management as you would a new hire.

• Aptitude profiles and in-depth interviews are tools of the trade.

Remember when used-car dealerships transmogrified their image by renaming their product as “pre-owned vehicles”? Talk about putting a bowtie around a pig’s neck. But the marketing is sound: You can sell an American nearly anything if it’s properly shined up.

Now, none of us wants to be among those who’d fall for the old swampland-in-Florida come-on. And if you’re in the position to buy agencies, how do you protect your firm and your track record for successful acquisitions? Read on, MacDuff.

What is the one key intangible in any agency transaction? Book of business and sales force rank high, but at the top of the list I would place management. If you have a great management team that takes on the merger with gusto, all other things will fall into place. On the contrary, a less-than-enthusiastic team can surely tank the deal. Put another way, that pre-owned agency might look pretty good when you kick the tires, but if nobody’s got their hands on the steering wheel or the drive shaft is missing, it’s going nowhere fast.

Ensuring that you have a good management team is the single most important element of a successful transaction. With 2006 shaping up to be another banner year in the M&A world, public brokerages, banks and privately held brokerage firms, large and small, are all competing for that quality seller. Many buyers are stretching their comfort zones to get the deal done. In such a frenzy, how do you evaluate the seller’s management to make sure that the deal is truly a quality transaction?

Management Due Diligence

Public radio’s “Car Talk” brothers have the same advice to every caller who asks them how to evaluate a used car: Take it to an independent mechanic for the once-over. It will cost a bit but be worth every penny. Their message is to be wary of simply taking the seller’s word that the car is sound. So it is with agency acquisitions. To borrow a concept from President Reagan: Trust, but verify.

We’re all familiar with transactions that wind up to be failures or disappointments or at the very least take much longer than anticipated to deliver expected synergies and growth. As a result, buyers have become much more sophisticated in their due diligence procedures. Most buyers will send in their mechanics to tear apart the engine and to poke, prod and analyze such areas as financial performance, operations, book of business, carrier relationships, legal and regulatory interaction, technology and even human resources practices. But arguably the most important area, due diligence on the seller’s ownership and management team, is probably the area that receives the least amount of scrutiny.

Most common is the interview process. Even when interviews are performed, they’re often done toward the end of the process, and many last just 30 minutes or so. What could be the most important component of the transaction, the one element that holds the power of ultimate success, is effectively given the old tire-kick. Well, before the rubber truly meets the road, don’t you think you should also have a good, close look at the tread?

If you’re a buyer, ask yourself this question: Have you ever been surprised by the personalities, skill levels or expertise of the key people at a newly acquired agency? Having been involved in M&A for more than 20 years, I can answer that for you: yes, you have. Nine out of 10 buyers will make such a comment to me after the fact.

I realize that you receive management information and data from many sources: offering memoranda, conversations with key employees and shareholders, employment records and other agency data. These objective materials support and inform your own subjective observations about skill levels and competency. But how deep your knowledge goes into the firm’s abilities can make the difference between the success and failure of the transaction. And what are those abilities if not the traits of the firm’s people?

Test Your Quarry

Today most firms subject new hires, especially those vying for key positions, to some sort of personality or aptitude profile, such Profiles International’s Profile XT, Bigby, Havis & Associates’ Assess tests or Caliper. Some run candidates through such a battery of tests you’d think it was an audition for a SWAT team negotiator. Bottom line: With all the investment your company has to make in a new employee these days, you want to make darn sure you’re getting the right person for the position. Why go through all the training and development only to find out the person isn’t suited for the job or to have them quit because they couldn’t handle what was being asked of them?

However, those types of evaluations are rarely done on key people within an agency being acquired. There are many important traits for which you could test.

Leadership ability is one. What is the leader’s management style? How will the managers you inherit with the firm conduct themselves in a crisis situation? Consider such traits as the ability to articulate their vision and to inspire others or the skills needed to attract top talent and motivate employees.

Another trait: operational tactics. Is your new top person an idea man or woman or an in-the-trenches sort that commits every detail of operations to memory? You need to know the particulars of your leader’s decision-making skills, managerial ability and communication skills.

A third trait to glean from testing is strategic ability. It is crucial, obviously, to know how your leader will adapt to and handle change. But you also need to know if your acquired leaders take risks or take a conservative approach, whether they’re able to see the forest for the trees, and if their overall attitude is to be a forward-looking thinker.

All of those traits—leadership, operational tactics and strategic abilities—can be gleaned from the answers to a basic profile test. Yet very seldom have I seen profile testing during the due diligence process. That’s too bad because understanding those traits would put you much farther ahead of competitors in evaluating whether this transaction would be beneficial to your firm. If you did decide to go ahead, the tests would greatly aid your knowledge of the new firm’s strengths and weaknesses, which could help you fast-track expansion efforts and avoid integration pitfalls.

Go with a Pro

During my years in a public accounting firm, where I performed M&A work on behalf of many large private and public companies, I had the very instructional experience of seeing the gamut of good, bad and ugly transaction processes.

One of my greatest experiences was working with a large, public company that engaged a human resources consultant on most transactions. The CEO’s belief was that, although he and his management team could get a good “read” on people, they were not trained in human resources consulting, nor did they have the necessary technical skills to perform that function.

It is a great blessing to realize your limitations and engage others whose skills complement your own. In some cases, this trait is the mark of an executive at the top of his or her game. That CEO’s candid assessment of the situation told him that, without using a professional human resources process, his firm would be simply—and dangerously—relying on gut instinct and intuition and that was no way to treat such a valuable resource as key people.

I’d hazard a guess that most people reading this operate along the lines of gut instinct and intuition in such a situation. I would guess many of you at some point have looked back on a transaction and said, “I wish I would have done a better job of evaluating the people that came along with that deal.” I’m not an advocate of using a human resources consultant on every transaction, but in many cases it should be carefully considered.

Six Key Procedures

Whether you use an outside consultant or your own due diligence process includes evaluation of key personnel, there are some basic procedures you should consider.

1. Include a detailed interview process. Your evaluation of the seller’s management and key people should be just as rigorous as your internal hiring process. Through a comprehensive interview, you will gain extensive insight into the people who will be coming along with the transaction.

Too many such interviews are warm and fuzzy. Your interview should be structured with questions that provide you with in-depth feedback on expected performance. Develop a formal interview guide that takes the employee through a series of behaviorally based questions that will give you a solid evaluation of competency in key areas.

2. Include some form of profile testing. Sometimes a review of personnel files will reveal results from previous tests from firms like Caliper or Bigby, Havis & Associates. But if you don’t see those, strongly consider having the test performed.

Information you’ll gain from such a test includes: ability to adapt to change; planning and organizing skills; level of decisive judgment; resilience; ability to deliver results; teamwork and collaboration skills; interpersonal communication strength; functional acumen; and level of integrity. Such a test can truly help you see inside the mind of an executive under consideration.

Seriously, don’t you want to know about a key person’s strengths and weaknesses, assets and liabilities? All the characteristics mentioned above are major influences on job performance.

3. Spring for a consultation. Those tests, like other specialized procedures, are only as useful as their interpretation. Have a professional interpret the results of the test, to provide you a detailed review of the findings and validate the results.

4. Add a background check. Again, look first to the personnel file for pre-existing background checks. If there and fairly recent, they could be sufficient. If not there, however, having one performed on each owner and key manager can provide another layer of data to support the transaction decision.

5. Survey employees about the agency. Finding out how the rank and file feel about their jobs, the company, its management and the coming changes can provide great insight to the deal. Try something like the “Organizational Growing Pains Questionnaire” from the book Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm, by Eric Flamholtz and Yvonne Randle. This simple questionnaire is an excellent tool to identify problems or issues in an organization that is going through change. And what could be more dramatic as far as change goes than being acquired.

6. Follow through with your findings. Assuming you complete the transaction, use the results of your research to help the achievement level of the acquired firm. Use the profile test results to coach managers on further development. From the “Growing Pains” questionnaire, you’ll gain much insight into the areas that need to be monitored or changed.

Deeper Questions

Most buyers are sensitive to possibly offending sellers, so they try to put their best foot forward during the transaction process. A side effect of this is that buyers often neglect to really dig deep to understand certain critical questions. At a minimum, buyers need to understand issues such as these:

• What is the real reason that the agency owner is selling? Do the responses make sense given all the facts?

• Are owners and key managers really committed to staying past the initial contractual period?

• What motivation does management have post-transaction to make sure the buyer’s and seller’s incentives are properly aligned? What incentives are there besides money?

• What are the real cultural values of the seller and the agency? Are they similar to yours?

• Does the management team have sufficient leadership skills and competencies to grow the agency beyond its current level?

Profile testing, extensive interviews, scrutiny of the curriculum vitae—all these things are considered vital to hiring a new employee, and they become much more important as you go higher up the corporate ladder. So why would you ever think of buying an entire company and in effect taking on a whole cadre of new employees including top management without going through those key hiring steps?

In such a case, your gut instinct basically amounts to luck. Your intuition may serve you well most of the time, but do you really want to rely on it solely when you’re gambling with millions of your company’s dollars? This is way beyond the crapshoot; this is betting the rent money.

Engaging in due diligence on the seller’s owners and key managers is your way of determining whether you truly want those people as your business partners. This professional approach will allow the buyer the ability to better manage, motivate, support, lead and hold accountable its “new hires” post-transaction.

In the end, don’t most of us in the insurance business say that quality people are our most important asset?

Lieblein is a contributing writer and managing principal of WFG Capital Advisors. rlieblein@wfgca.com