Brokerage Ops the M&A 2018 issue

Integration: A ‘Dirty’ Word?

The many ways buyers approach integration can make the process feel like a great unknown to sellers.
Sponsored by MarshBerry Posted on March 29, 2018

What will happen with the brand, technology and human resource functions? How will the coming together of two organizations impact the culture? What does it mean for the people?

Without thoughtful consideration of the following different integration items and approaches, sellers may find themselves facing challenges to preserving their culture during the transition from independent agency to third-party ownership. If expectations are not clearly set or communicated in an effective way, changes in staffing, policies and procedures may negatively impact the culture an owner has worked so hard to build. It can be very easy in the event of a sale to create a perception of secrecy and exclusion if the impact to employees’ roles, responsibilities and compensation is not clearly communicated in a timely manner.

To be sure, integration means different things to many buyers and sellers, and that’s because there are several different approaches to the process. In our experience, buyers generally can be categorized into three buckets in terms of how they view integration: centralized, decentralized or somewhere in between. (See what we mean by murky waters?)

  • Centralized: Buyers operating under a more centralized structure integrate acquired companies into a larger corporate infrastructure in all functions, including IT, accounting, HR, claims and licensing.
  • Decentralized: Buyers in a decentralized structure absorb few, if any, duties on the local level. Usually after the deal closes, day-to-day operations do not change.
  • Somewhere in Between: Not all buyers fall into the completely centralized or hands-off categories. Plenty of buyers take a hybrid approach and will roll in certain operations (accounting and HR, for example) while leaving other areas up to local offices.

The reality is sellers typically do not know what to expect when it comes to integration, even though they often have goals they want to achieve. Some sellers relish the idea of getting rid of all things accounting/finance, while others have a strong, strategic accounting/finance function and want to maintain that at a local level. And sellers can mistakenly assume that by “giving up” functions to corporate, they’re eliminating a cost. However, responsibilities that the buyer decides to centralize often come at a cost to the seller’s income statement, impacting the earnings before interest, tax, depreciation, and amortization (EBITDA) at closing and during an earnout period. So while a seller might think an operating expense is eliminated, the buyer is actually replacing that with some type of cost allocation. For this reason, among others, it’s important for buyers and sellers to come to the table with a clear understanding of each other’s integration expectations and goals.

Four Key Integration Areas

We believe branding, IT, HR and accounting/finance are key to integration. Here’s how different acquirers treat those operations based on their approach.

Branding: Branding integration can take on many different forms. Some buyers are quick to transition letterhead, logos and websites—they want to maintain brand continuity and leverage a strong national reputation in the marketplace. Others make little to no changes to marketing or branding. Buyers might allow acquired businesses to maintain their logos, websites and trade names in the marketplace. These buyers might even forgo a public announcement of the transaction or reference to the change in ownership. Finally, there are acquired agencies that carry two sets of business cards—depending on the client or prospect they are visiting, they may use whichever one they feel gives them an advantage at the table.

When there is a transition, we often see the buyer and seller work together to gradually implement branding initiatives. An acquired business might use its own brand and/or co-brand as a “division” or “partner” of the acquiring agency. The co-branding phase can last months to a year, depending on the circumstances.

Information Technology: There are several phases of IT integration. First come simpler tasks that are tackled soon after a transaction—like creating new email addresses or redirecting website traffic to a new landing page. Other IT-related issues, such as getting the seller under the same contract for duplicative software and systems (e.g., agency management systems, ratings software, subscriptions), may not be so easy. The acquirer might have to let the term of the current contract with the vendor run out before consolidating onto one master agreement. Other applications may be so unique to a seller’s niche that the buyer doesn’t currently utilize anything substitutable, so nothing changes. Hardware like phones, printers and computers tend to be handled case by case, with some larger national buyers utilizing national contracts but many leaving these to be managed locally. Some buyers do not even require a common agency management or accounting system if monthly reporting can be completed in an acceptable format.

Human Resources: Some buyers synchronize timing of raises and reviews, standardize titles and paid time-off allowances, while others allow acquired agencies to keep their own schedules and policies. Nearly every buyer in the marketplace will require a seller and its employees to terminate their benefit and 401(k) plans and join the parent company’s plan. Often, there are concerns about employment discrimination or fairness that could be raised if different benefits are being offered to different employees of a parent company. Recruiting and onboarding are also handled differently by different buyers, with some opting to use national/corporate resources to potentially draw a larger pool of candidates and others leaving these tasks up to local offices, where there is a greater knowledge of the community and available talent.

Accounting and Finance: Accounting and finance tends to be the area most integrated by buyers, regardless of size. There are often meaningful efficiencies to be gained by consolidating functions like accounts receivable, accounts payable and direct bill reconciliations. Most buyers have a corporate chief financial officer who will either manage a corporate team of accountants or the agency’s local staff. Accounting policies and procedures are often standardized to make sure reporting across agencies is consistent.

Is Integration Really a Dirty Word?

Integration can be the elephant in the room during an M&A transaction. There are plenty in the marketplace that view integration as a dirty word, and they’re reluctant to discuss it in detail early on in the transaction. Many integration details do not emerge until after a letter of intent has been signed. But having the talk sooner and maintaining open communications is key. Sellers should know how and in what ways their organizations will be integrated after the deal is done. How will the transaction impact the operations and culture? Do the buyer’s goals and objectives align with their own?

Some sellers are eager to release themselves of certain corporate responsibilities and decisions, while others are interested in maintaining complete autonomy after a sale. Not having a clear understanding of where a buyer may fall on the spectrum could lead to either a deal that does not close or disappointment and resentment after the fact when expectations fall short of reality. So talk about integration early and often. Make this discussion a part of the M&A transaction process so there are no surprises after the ink dries.

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