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Be Careful What You Ask For, You Just Might Get It

When I think about the landscape of insurance and financial services as well as HR and PEO solutions, I organize my thinking in the following way.

There are basically three kinds of firms that are making acquisitions:

  • Large publicly traded firms,
  • Large PE backed firms that are operators or simply financial roll ups,
  • Smaller PE backed firms that are later to the game... but also following a path of rollup or operating company

As a backdrop to the larger verticals of insurance and financial services (here I am referring to retirement and wealth,) the segments are great businesses and almost every firm in the space has done well over the past decade. Beyond that and under the surface, firms could not be more different.

At the highest level, the differences between a rollup and an operating company are pretty simple. Rollups are a financial transaction only. There is no integration of business, rarely a common brand, no real data integration beyond commissions or fees across firms and no common ways of doing business. There is plenty of window dressing about get-togethers, carrier commission arbitrage and vendor improved economics, but in terms of impacting a firm’s ability to compete in a local market, the property is usually less capable than prior to the transaction because staff has often been reduced and the owner has gotten paid.

Let me be clear. There is nothing difficult about being a financial roll up.

Think of it this way—you get access to capital, you meet people, you put together spreadsheets, you talk a good game, and you convince “owner/entrepreneurs” to join like-minded “owner/entrepreneurs” to take multiple bites of the financial apple. Additionally, you don’t need to change or evolve anything. There is no “friction” to this process, nor is there any real value creation beyond getting bigger and positioning to the next private equity team or public market that you can continue to do the same thing for another four to five years. It’s great until you get too big and then the firm gets sold to an operating company and the pain begins. See HRH, Acordia, Wells Fargo etc. All this aside, here is the most important thing to know. No one ever in the history of financial rollups—in any industry, has ever uttered the words,

Building an operating company that focuses on culture while doing acquisitions is a much more challenging and nuanced endeavor.

In this arena, you access capital, you meet people, you put spreadsheets together, you talk a good game and convince “owner/entrepreneurs” to evolve and build together downstream. It involves rebranding, managing data the same way, finding common ways of doing business and teaching the acquiring company something new. It involves creating best practices, creating shared services teams and a hundred other things while building a common corporate culture. In a perfect world, the team that joins feels about your brand the way they did about their previous company’s brand within a year or so. It is a much heavier lift. Common sense would suggest it’s a much better way to build a great company.

I would suggest the hardest thing for firms to do is walk away from acquisition opportunities where the math of the deal works, but the people fit is wrong.

We learned this lesson the hard way years ago. I believe most acquirers never really learn this lesson. Today, at least one operating company that does acquisitions has uttered and continues to utter the words,

We are going to build an amazing company, maybe even of company of consequence that changes the industry.

What I am really trying to get at is the following—an owner must really understand the type of firm that is sitting across the table. Every firm has talented storytellers, and every firm has a success story over the past decade or two or three or more that can sound compelling. This is where common sense needs to come in to play as you understand the tradeoffs not just for you, but for the teams you may ultimately leave behind when you decide to exit the business.

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