Agency principal Sean Cornelius talks about the lessons he has learned from making a half dozen acquisitions since 2016. He stresses the importance of a thorough investigation into the new business to avoid surprises after the final purchase. He reminds us that the costs of an acquisition frequently go beyond what you pay the seller – you will have to integrate the acquired book into your operations and that takes time and money. Sean concludes that taking risks is great, just so long as they are calculated risks.
Edwin K. Morris (1s):
Welcome to the trusted advisor podcast brought to you by Iroquois group. iroquois is your trusted advisor in all things insurance. I’m Edwin K. Morris. Today’s guest is Sean D. Cornelius, and he is the president of Weed Ross group. Sean started his insurance career while he was still in college, working summers for his father and his insurance agency in Erie, Pennsylvania. Sean attended St. Bonaventure university in Allegany, New York in 2003, earning his bachelor’s of arts in philosophy and pre-law.
Edwin K. Morris (40s):
In the scope of expansion in looking at acquiring new agencies, what’s all to do with negotiation? What are some factors you even start with?
Sean Cornelius (48s):
Number one, I think as in any business deal, is you can’t become emotionally invested. So you have to be able to walk away from the deal and realize that if it starts to go sideways, which a lot of these deals have a tendency to do, that you can say, well, this is not built into what we’re looking for. It doesn’t feed our vision. And at that point you can say, you know, thank you, but no, thank you and remove yourself. So that would probably be first and foremost.
Edwin K. Morris (1m 17s):
What keeps that buffer for you? How do you not get, I mean, geez, this is your baby, right? I mean, you’re building a business. So how do you not get emotionally tied to something? I mean, there’s gotta be a gut check, too. I mean, there’s, it can’t all just be on paper. Can it?
Sean Cornelius (1m 32s):
I think the most important thing is to protect your existing business. So for me, Weed Ross group is my existing business. And I look at anything that would harm that. I’m not risk adverse by any means. I, I will take risks left and right, but they need to be calculated and they need to fit in with the agency mission. So if I, you know, if I start getting into a deal and there’s a whole bunch of stuff that wasn’t disclosed or that the numbers don’t make sense, or the relationships don’t make sense, or maybe the quality of the business that I was led to believe is not at that same quality. Then those are, those are signs where you want to walk away or carrier relationships have been terminated for cause – anything that’s glaring like that should lead you to walk away.
Sean Cornelius (2m 22s):
And that would kind of be the first step.
Edwin K. Morris (2m 24s):
So those, those big indicators, those hard stop type things like you just spoke of, that I get. I mean, that’s like red flag is in a major way in play here. All right. That’s not going to work, but there may be some smaller pieces that are kind of like, well, all right, that’s not great, but you know, what, what carries you through? If, if you, if you’re gonna not be emotionally involved, cause you can’t get tied to the outcome, right? You have to let the process drive the decision, not the decision drive the process. Is there a tipping point for you that, you know, other than these huge red flags?
Sean Cornelius (3m 3s):
You know, if you get past that, I’ll look at it. You know, how much is it? The other things that might be small roadblocks is how much is that going to cost you to, to onboard? So for instance, if they have no automation, no agency management system, you got to scan all the files in, or you got to add all the clients. Well, how many clients are there? You know, and if they say, well, there’s 800, well, that’s doable. You know, if they say we have, you know, 5,000, that’s, that’s going to be very hard to meet that goal. So that would be one of the things that you would look at. You want to look at the employees, if there’s any opportunity there. And then you want to look at what does that person want. I remember an agency I was really, had gone in and was interested in paying on retention, which means that you will only pay them if the business stays on the books.
Sean Cornelius (3m 52s):
And so we were going around and around with how we were going to structure this deal. And I didn’t ask the question until after a few minutes, well, what do you actually want? And sometimes in a negotiation, you really want to find out what they want and what they wanted was not unreasonable and perfectly fit within what we were willing to offer. So sometimes just, you know, get right down to the brass tacks and, and come up either with a multiplier, which, you know, folks that have gone through this before will know that can be anywhere from one to two and a half times. Or you come up with a dollar amount based upon how, how much revenue they have, what their book is.
Sean Cornelius (4m 33s):
And people have emotional needs too. So they may, you know, maybe John Smith and sons, and they want it to say John Smith and sons’, or they want, you know, that agency location to say open, or they want you to continue to work with a certain company. It could be any kind of different emotional concerns that protects their legacy after you are gone. So you really need to know what the seller’s concerns, what’s important to them when you’re buying is a major part of that.
Edwin K. Morris (4m 59s):
So just trying to get that all out in a concise manner has gotta be a huge time sink, right? There’s gotta be a huge amount of time involved even to get to the table.
Sean Cornelius (5m 10s):
Yes. There can be a huge amount of time. It can also go very quickly, we did purchase one agency in three weeks. That’s a very quick process. I mean, there’s other agencies that could take years to come to fruition from when you first started talking to them. Insurance is one of those industries where people don’t tend to retire early, unless there’s, you know, unless they’re moving out of town or there’s a need for them to retire early. A lot of people hang on late into their career. Cause that’s usually when they build up a book that makes it worthwhile for them to hang on and keep at it and they build up the reputation. So lining that up can often often be difficult.
Edwin K. Morris (5m 50s):
What’s easy to overlook in negotiations?
Sean Cornelius (5m 53s):
I think the numbers, you know, the numbers don’t lie. So it’s easy if you get wrapped up in it emotionally in an agency to, to dismiss, you know, something that doesn’t jive with the numbers, if you’re not careful, if you’re moving too quick. You can come to an agreement with, with someone, you know, kind of a, a handshake type deal before you actually put anything legally in writing that you have an understanding so you can get something negotiated, but you still have to, to see the, the carrier reports are huge. We need to see those. Not only to tell you how much business they have with carriers, but if they have an active appointment, what kind of loss ratio do they have.
Sean Cornelius (6m 33s):
And so profit sharing, as any agents listening would now, can be a major factor. So if you purchase an agency that has one of your carriers and you have a lot of business with them, and there’s a really bad loss on there, like say there’s a, you know, half a million, million dollar loss that could lose you a lot of money. And so you want to talk to the carrier-
Edwin K. Morris (6m 52s):
In the long run, right?
Sean Cornelius (6m 55s):
At the end of that year, even. So yeah, yeah. I mean, at the end of the year, they evaluate that. So you want to talk to that carrier and see if that’s something they can wave or, you know, investigate what kind of losses that agency has. And also if there’s a pattern of losses or, or payment history of whatever the pattern with the clients might be. So that was great.
Edwin K. Morris (7m 14s):
So all of these parts and pieces ended up being your negotiation, weights, and measures, right. Pro and con for them, for you. I mean, once it’s all evaluated,
Sean Cornelius (7m 25s):
You need to look at the agency like anything new to you. If you’re buying a boat and the guy’s like, well, the motor’s got some hours on it and it starts sometimes. I mean, you know, I mean, it’s just, it’s no different, right? You got it. How does this thing run?
Edwin K. Morris (7m 41s):
Isn’t the big difference that an inanimate object, like a boat, is a little more objectifiable versus one that works with people. So how do you, how do you get a handle on that part? Just the culture, the people
Sean Cornelius (7m 56s):
Being there is a big part of it. When you walk into an agency, when we go after agencies for acquisition, we like to go there in person to start with. Online will only get you so far. When you walk in the door, you get a feeling immediately when you walk in that business, how you’re greeted by the staff, what the, what the place looks like. You know, if there’s papers all over the place, everything is totally unorganized. Well then you’re walking into a bit of a mess. What carrot, you can tell what companies they have by the plaques on the wall. A lot of times just being there in person, you can tell a ton about how that business is run. You know, if there’s, if there’s some miles on that, or there’s an, you know, a mechanical problem with a boat, you can tell that it’s, you know, I mean, I’m being a little funny here, but,
Edwin K. Morris (8m 42s):
But that’s really how that, yeah.
Sean Cornelius (8m 44s):
I mean, it’s, it’s a matter of investigating
Edwin K. Morris (8m 46s):
The boots on ground is the only way to see what’s going on. But how do you, I guess that’s a very subjective thing, right? I mean, you kinda gotta, you can observe and kind of get a feel for the space, for the environment, for the people, but how would you calculate it? How do you calculate that?
Sean Cornelius (9m 6s):
Well, I think it has a lot to do with your own organization. You know, what capacity do you have to address those challenges? If you’ve been through this before, then you can say, well, we know how long it’ll take us to automate this agency. Or we know, we know that we’re not going to stay with this particular carrier, but we can move this business to another carrier. Or this is more valuable for us because we have, you know, they have nine carriers in this agency. We have all nine, so we don’t have to do a ton of paperwork. Any the time you bring on a new carrier, there’ll be a lot of paperwork involved. So if you go into an agency and they have 15, 20 new carriers that you don’t have, not only may you not want those relationships, but to get those relationships is going to be incredibly time intensive and labor intensive.
Sean Cornelius (9m 51s):
So those are all major considerations, how it fits within your organization should be part of the negotiation process, because the easier it fits within your organization, the more valuable it is to you,
Edwin K. Morris (10m 3s):
The less friction it is going to take getting it in, right. I mean, it’s just less friction all the way around.
Sean Cornelius (10m 8s):
Yeah. Yeah. It’s, if it aligns better, your onboarding process is going to be easier. And if your onboarding process is going to be easier, the staff will get back to business as usual and you’ll make more money. Any kind of disruption in your organization, you know, can certainly cost you money and time. And so you want to make sure that you can get an integrated as quick as possible and it’s the least disruptive as possible. And that should go into your negotiation process. Sure. Like I was talking to an agent that had all paper files now then saying, well, this is going to be an issue, but we’ll factor that into the cost. Or if they have brokered business, meaning that they don’t own all the business, they pay someone else on some of that business.
Sean Cornelius (10m 48s):
Well, that’s not worth the same amount of money because they’re paying someone else on it as well. Yeah.
Edwin K. Morris (10m 53s):
So you’re doing a profit, not a profit and loss, but you’re doing a balance sheet kind of inspection, a heavy in depth inspection to just really evaluate what the current, not just the value of the business, but the cost of bringing it in, right. The cost of making it part of the enterprise. Well, thanks for talking about this acquisition piece, because it’s, it seems kind of scary. It’s got to have its own pluses and minuses, but I’m sure everything you’ve provided will help aid anyone thinking about doing that.
Sean Cornelius (11m 26s):
Yeah. Thank you for having me. I would say to the other agents out there, just make sure you do your due diligence, use your common sense, going somewhere in person, getting a good look at it can really help and take a look at your own organization, how well that aligns with your own organization. And that should give you an idea of, you know, what a fair price would be in not only what’s out in the marketplace, but for this particular business and how well it fits with your business.
Edwin K. Morris (11m 51s):
Thanks for listening to this edition of the trusted advisor podcast brought to you by Iroquois group. Iroquois, your trusted advisor for all things insurance, and remember get out of the office and sell. This program was recorded live at the Cohen the multimedia studio on the grounds of Chautauqua institution. I am Edwin K. Morris, and I invite you to join me for the next edition of the trusted advisor podcast.