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Live Oak Lending with Michael Strakhov

By June 23, 2020July 9th, 2021Agency Management Moments

Financing a merger or acquisition may need some professional help.  Michael Strakhov from Live Oak Bank, joins us on the podcast with a comprehensive list for both parties to think about before stepping into an acquisition. The episode contains tips like, “not all revenue is created equally” to “don’t wake up Monday and plan to sell on Tuesday.” Mike’s episode is full of actionable takeaways. Give it a listen and let us know what you took away. If you would like to speak with Mike about financing a project, please reach out to your Iroquois Regional Manager to set up an time. For more information about Live Oak Bank’s partnership, click here.

Who you need on your team when it comes to financing a merger or acquisition.

Edwin K. Morris (3s):
Welcome to the trusted advisor podcast brought to you by Iroquois group. Iroquois is your trusted advisor in all things insurance. I am Edwin K. Morris. Our guest today is Mike Strakhov. Mike joined Live Oak Bank as the head of insurance lending with more than 27 years in the insurance industry. Mike has worked as a claim adjuster, commercial producer, personal and commercial lines marketing manager, and the head of a large multi-state agency. Prior to live Oak, Mike served as a branch service president of CNA insurance companies for the state of Ohio, as well as a tenure with Chubb and first Niagara risk management.

Edwin K. Morris (45s):
Mike, let’s get straight to it. What should sellers be thinking about as they prepare to sell their agency?

Mike Strakhov (51s):
Edwin, great question. You know, a situation where an agent is looking to sell is as much a retirement discussion as it is a financial transaction. So agents really should be taking time before they decide to sell, to figure out exactly what is it that they’re looking to accomplish in retirement, not only from a time perspective, but also from a financial perspective. Is the sale price of the agency going to be enough to allow them to accomplish what they’re looking to retire, looking to do during retirement. I think agents also should look at their insurance agency as objectively as they possibly can, look at it as if they were going to buy that agency and try to identify if there’s any weaknesses in the business model or the results.

Mike Strakhov (1m 37s):
Things like historic profitability, you know, has the agent, agency made money over time? Are they profitable with their insurance carriers? What’s the current staffing situation are all the employees of the same age as the seller and are on a very short trajectory to retirement? Growth of the agency is important. You know, what has the agency’s results been in the last, you know, three to five years. Agents want to buy another agency that shows signs of positive growth and the ability to grow the business in which they currently have. Things like concentration of, of certain things. It could be revenue. It could be aggregation of revenue with certain producers within the agency, aggregation or concentration of premium with certain carriers within certain industries.

Mike Strakhov (2m 25s):
Those all can be positives, but they could also be negatives. And a lot of buyers are looking for a diversified portfolio that does not put too many eggs in one particular basket and allows the agent to, to navigate potential changes within the book or salesforce and or other employees within the business. And then the overall quality of the book of business. You know, what carriers is it with? Have you been with these carriers for a long period of time? So a history of stability with these carriers is going to be important and a history of profitability. And the book of businesses is a representation of who those clients are. And you know, the more easy you are to identify a quality list of clients that you’ve had for a long period of time, certainly adds value to the agency.

Mike Strakhov (3m 13s):
And agents really should be thinking about what are their goals as a result of selling the agency? Are they looking to maximize the sell price of the agency or are they looking for that agency to continue on and take care of employees and customers as the agency moves forward post-transaction? Does the agent want to walk the day of the sale or are they looking for a continual revenue stream after the sell of the agency? You know, post-close, agents really need to think about what are the ramifications of that sale? What are they going to do with the proceeds of that sale and tax ramifications, legal ramifications, et cetera. So really understanding what your goals are, are going to be important.

Mike Strakhov (3m 54s):
And with that said, you really should have a team of people to consult with. Certainly the people that you plan on receiving the financing from. So your banker, lender, an accountant, an attorney, a financial advisor all can be very productive conversations to have prior to selling the agency to understand really how all of this is going to fit into your plans.

Edwin K. Morris (4m 18s):
Well, Mike, how far in advance should an agency plan for selling their agency?

Mike Strakhov (4m 22s):
Really the, you know, it sounds like a cliche, but certainly the sooner, the better, you know, making sure that you’re, making sure that you’re thinking about it, you know, waking up on Monday, deciding to sell on Tuesday, doesn’t really give you an awful lot of time to plan. And that’s the extreme example, but really starting, you know, a few years out. And, you know, as you go through your discovery of potential weaknesses or how to maximize the value, there might be things that you need to do that will take time to make corrections or improve the results of the agency. A lot of these things don’t happen overnight. So it really should be, you know, at minimum a year, if not a multiple year process in preparing to sell the agency,

Edwin K. Morris (5m 1s):
What would buyers be thinking about as they look for acquisition candidates?

Mike Strakhov (5m 7s):
Well, as you’re looking for a candidate to acquire, I would say the first thing to consider is the cultural fit. Many times, you know, agents look, these look at these opportunities as a financial transactions and spend a lot of time looking at the numbers. Particularly if it’s a situation where the employees will be retained, a location will be retained and it needs to be managed from the existing agency, the buyer, if you will, making sure that the cultural fit – everything from their policy on employees time off, their healthcare benefits, you know, how and when to use the agency management system, documentation, the closer there is that fit, the better the transition for that agency will be.

Mike Strakhov (5m 53s):
So that’s really important. Another quality that an acquiring agency should look for, it would be the, you know, the common carriers. If there’s a situation where there’s a lot in common, again, transition risk, risk is down. And ultimately again, an overused cliche, you know, if one plus one equals three, that’s really what you’re looking for in an acquisition that when you bring this book of business into yours and merge it together, does that allow you to maximize a profit potential, reduce the need to introduce additional carriers to existing staff, et cetera. So really trying to find the uplift for an acquisition is going to be very important.

Edwin K. Morris (6m 31s):
What about talent?

Mike Strakhov (6m 33s):
There may be situations where talent is important and you can obtain additional younger, more talented individuals through an acquisition than you might be able to hire on your own, train, et cetera. So that would be certainly a consideration. This might seem too obvious, but a fair and reasonable valuation. You want to make sure that, you know, there’s a lot of folks that have expectations of their agency from a value perspective that are probably outside the realm of reasonableness. And it doesn’t do you any, any good to buy an agency in a situation where it’s either overvalued, overpriced and making sure that you know, it is a possibility or will be a likely possibility that you will flourish, not suffer, post acquisition, trying to service the debt and pay for the agency over time.

Edwin K. Morris (7m 19s):
We’ve been talking about the purchaser’s side. How about the seller side? What would you suggest to an agency to how to find acquisition opportunities?

Mike Strakhov (7m 27s):
Well, it’s great from a seller’s perspective because it’s certainly a buyer’s market right now, there are more buyers than sellers. If you got a room full of agents, a hundred agents and asked them who’s willing to acquire, most will raise their hands. So most are looking for some level of acquisition, which really puts sellers in a great spot so they can pick and choose, and as they develop their goals and what they’re looking to accomplish, you know, many times agents might be looking to maximize their value and maybe talk to somebody that’s willing to pay a higher price, right. But that might entail the agent working for a number of years post acquisition, and that might not necessarily be within the plan. So the better a selling agent has of what they’re trying to accomplish, that’s great, greater possibility for better alignment.

Edwin K. Morris (8m 12s):
Where are there opportunities for missteps in the buy sell process?

Mike Strakhov (8m 16s):
I mean, the biggest we see is the potential for overpaying. Many agents get a, they fall in love with the deal, not necessarily the numbers, see all the reasons why it makes sense for reasons other than the financial aspect of it.

Edwin K. Morris (8m 30s):
Somehow that passion gets tied into the deal and that overrules the logic.

Mike Strakhov (8m 35s):
Absolutely, absolutely. So, you know, role as a, you know, I’m a lender, so my role is a, you know, sometimes reeling people back to earth and focusing on the numbers and making sure people are making the right decisions for the right reasons. Another misstep could be, you know, poor due diligence on the revenue, understanding not all revenue is created equal. Let me say it that way. Some revenue might be, you know, as a few examples, you know, non-standard auto might be a different quality of revenue as it might be for standard or preferred personal lines business, for an example, or commercial revenue. And you might have a, you know, right now would be pertinent with regard to a big restaurant book or something along those lines that in an industry that’s particularly impacted by COVID-19.

Mike Strakhov (9m 23s):
So understanding and anticipating, you know, the vulnerabilities of that book is going to be important. Bad cultural fit, not to beat this to a pulp, but you do see situations where acquisitions do not succeed because the angst created post acquisition that create problems for people. And really your, your goal to avoid missteps is to avoid any post-close surprises. It’s very, sounds like it’s easier said than done. What you need to do is kind of play out all the possible scenarios, understand, you know, the vulnerabilities, the risks associated with it, and really making sure that you’re putting together a plan that’s going to allow you for the best possible post-transaction transition

Edwin K. Morris (10m 3s):
So otherwise than having a financial magic eight ball, when it comes to financing the transaction, what are some best practices to ensure there are no surprises?

Mike Strakhov (10m 13s):
Starting early, you know, at times there’s discussions that go on for years about, you know, potential acquisitions or perpetuation scenarios. And at some point, and usually it’s much later in the process, a lender is brought into the scenario to understand what are the options and how you going to finance this. And many times there’s aspects of the deal that have already been pre negotiated. It’s already set expectations, both for buyer and seller, and then they approach a bank and many times, or there could be aspects of those agreements that might be problematic just from a structure perspective. It might not work from a financing standpoint. We do find at times, you know, in a perpetuation scenario that maybe the candidate is not bankable, they’re not somebody that has the proper credit does not have the resources to meet maybe a down payment requirement.

Mike Strakhov (11m 3s):
They might be somebody that is deemed by the financing company as maybe not capable of running the agency, might be a good person, might not be there long enough, might not necessarily have the experience. So it might be the plan on paper, but does that actually translate to like, you know, an opportunity to convince somebody to lend them money in order to get that done? One thing that’s very important for agents to do, particularly if they are looking for financing is really run their agency like they plan on selling it tomorrow. The more, you know, there are situations where we see that the agency that they’re looking to acquire is actually a much better run agency than the agency that’s looking to acquire it.

Mike Strakhov (11m 44s):
You really want to see two equally well run agencies on both sides of that equation, because it’s more likely to mirror the acquirer’s agency than the acquired agency after the transaction. So you’d like to see a quality operator being the one that’s looking, looking for financing.

Edwin K. Morris (12m 2s):
What’s your final thoughts you’d like to leave our audience with today.

Mike Strakhov (12m 6s):
Ultimately for borrowers, they really should consider starting the process as early as possible. And that could include a somewhat informal conversation with the lender to talk about the guidelines, what it looks like, what they can anticipate, how long does the process take so they can better prepare themselves at the time of the closing to be as prepared as they possibly can be and get the financing.

Edwin K. Morris (12m 29s):
Thanks for bringing all this dollars and cents and taking the emotion out of this whole transactional litany of things to consider.

Mike Strakhov (12m 37s):
This has been great. And I certainly appreciate the opportunity to speak with you today.

Edwin K. Morris (12m 42s):
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. I am Edwin K. Morris, and I invite you to join me for the next edition of the trusted advisor podcast.

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