Anatomy of an acquisition

THE SELLER: TIM HALL, BISHOP SKINNER

The decision to sell came about after the principal shareholder of London-based Bishop Skinner, Doug Bishop, passed away. However, a sale had been discussed on and off for several years. The age profile of the senior management team meant that raising the capital ourselves to increase our shareholding was not an option, so we had spent the past few years getting the business into shape for an eventual sale.

Steps taken included selling the financial services division and winding up several trading companies, finding a purchaser for our business premises - which the business had bought freehold as an investment several years before - and generally ensuring the business was in good shape, both financially and in terms of our processes and procedures, including Financial Services Authority compliance.

Early in 2005, we were approached directly by an acquisitive insurance broking business that we had known for many years and we entered into talks. The attraction of this direct approach was that it looked simple, as we would only be talking to one company, and thus confidentiality could be maintained and we would be able to keep the transaction costs down. However, a venture capital firm was involved in that business and the influence it had on proceedings meant that the prospective buyer did not value our business in the same way that we did. After rejecting an offer that was substantially lower than we believed Bishop Skinner was worth, we walked away, despite having spent considerable time on it, and left feeling disappointed and deflated.

We realised that the problem with responding to a direct approach was that we were not in control of our own destiny. We were talking to just one buyer, but our buyer may have been talking to a number of sellers. No offer is as simple as cash at completion, and it is very difficult to know if the offer is fair, not only as to price but also as to the earn-out, without talking to other people and risking word getting out that we were in sale talks.

It was at that stage that we called in IMAS, having known the firm for several years. As mentioned, we had believed that we could handle the sale process ourselves but, after the letdown we had experienced, we realised that we needed expert advice. Using its knowledge of the market, IMAS formulated a lengthy list of potential purchasers based on businesses it knew were interested in acquiring, that had the capital capability to do so and those that would be a good business and cultural fit for Bishop Skinner. Working with IMAS, we were able to whittle down to a short list of five to six firms.

Interestingly it would not have occurred to us to approach Stuart Alexander. Stuart Reid had worked for us prior to setting up Stuart Alexander some 13 years ago and, although we knew the business had done well, we did not appreciate how successful it had in fact been. Stuart has also built a strong management team around him, which was important for us because, in addition to the financial considerations, we were keen to ensure the acquirer would be able to offer our staff a secure future.

IMAS contacted a number of possible buyers to ascertain their current strategy and appetite for acquisitions. Having reviewed the results of this work, we agreed to send the information memorandum to just five of the best-qualified parties. Restricting the number reduces the risk of there being a leak and avoided the need for excessive meetings. IMAS sent confidentiality letters to the parties and, subsequently, the information memorandum inviting offers for the company.

After we received these offers we moved forward into further negotiations with two businesses, one of which was Stuart Alexander. This process involved meeting key members of staff to identify common ground and discussing our businesses in detail in order to ensure a business fit.

Stuart Alexander's wasn't the highest offer we received but it stuck to its original offer, while the other party initially had to be pushed up on the price and its detailed requirements left us uncomfortable. However, the key determinant was the cultural fit and what the potential buyers had planned for our staff, especially as a move would be required since we had disposed of our property.

Stuart Alexander planned to take on all our staff and had the capacity to house them all in a single building, while the other buyer had planned to divide our staff between two premises and it was our view that both our staff and clients would suffer as a result. So, in June 2005, we signed a head of agreement with Stuart Alexander.

In a way, this was only the start of the stress. We then began dealing with detailed due diligence, disclosures, warranties and indemnity wordings and security. As with most acquisitions, the whole process took longer than we had envisaged and involved numerous external parties, but we completed in December 2005.

Just weeks later, Bishop Skinner moved into Stuart Alexander's Fenchurch Street premises. Though this was fast, we decided it was best to move quickly in order to keep momentum and to begin operating as one company as soon as possible. Though there have been the inevitable teething problems, Stuart Alexander's staff and management have been most welcoming and now, almost three months on, the deal is bedding down well.

You only have one opportunity to sell your business and what this process has taught us is that, while we may be good insurance brokers, selling a business involves all sorts of different skills and issues that are best addressed by a specialist adviser. Getting advice also protected the value of the business by allowing us to get on with what we are good at and stay focused on our day job.

THE BUYER: STUART REID, STUART ALEXANDER

Having bought four of the 14 businesses we have acquired previously through IMAS, we know they present their clients well, enabling all interested parties to gain a good understanding of the business. As we remain on the lookout for acquisitions, we keep in regular contact with them in case the right sort of business emerges.

When we were contacted by IMAS regarding Bishop Skinner we were very interested, given their business profile, mix and size. When it was revealed that the seller was Bishop Skinner our interest was heightened; we knew they were a good-quality business with long-term clients, a fact that I understood more than most, having worked there many years ago. We have always been keen on scheme business and Bishop Skinner's yacht facility is well-known and fits very well with our interests. In addition, we had space to fill in our City office, and my insider knowledge also led me to believe that, culturally, the deal would be a good fit.

We valued the business based on the excellent information provided by IMAS and came up with what we believed was a fair and true price - it did not change from day one to the conclusion of the deal. This has been the case with previous acquisitions we have done and we would like to think that we are building a reputation as an acquirer that simply does what it says it will.

I was aware that having previously worked at Bishop Skinner in a junior position could have been seen as a disadvantage so, when negotiations commenced, I was keen to include both our senior management teams in the discussions in order to highlight the depth and breadth of management talent we have built up at Stuart Alexander.

Culture is crucial to getting the most out of any deal and I was certain that we could prove that Stuart Alexander was the right place for Bishop Skinner's staff, providing them with an embracing environment rather than one in which budgets and numbers are the driving force, to the exclusion of nearly everything else.

Any purchase is a complex transaction, especially if bank finance is involved, as in our case, and we believe that doing a thorough due diligence, and planning the integration of the acquisition, are very important parts of the process. We try to ensure that the planning is as thorough as it can be so that there are no surprises, especially where we are going to move the staff into our office. After signing the heads of agreement in June 2005, the due diligence and planning process kicked into full swing and, to ensure we had covered our bases, we brought in independent external advisers to conduct due diligence in parallel to the work we were doing internally.

This is the first acquisition we have completed since the introduction of regulation under the FSA and the involvement of the regulator in the industry only made it more important to undergo thorough due diligence to avoid any nasty surprises. In order to smooth the way throughout, we kept in regular contact with the FSA and communicated our intentions to it before, during and after the deal.

This thorough due-diligence work was made easier for all by the preparation done by IMAS and Bishop Skinner, which, having already disposed of the financial services division and with a buyer lined up for its business premises, made our life much more straightforward and the deal far more attractive. IMAS' involvement ensured that the deal continued proceeding, even when issues arose that without the involvement of an adviser could have seen a stalemate develop and the deal stall indefinitely.

Though the business integration occurred quite quickly after the conclusion of the deal, we wanted to move fast in order to ensure that Bishop Skinner's staff felt involved and included in the process and could see what Stuart Alexander was really like rather than letting the rumour mill move into overdrive, which is where unfounded fears develop. The integration is now progressing well and we are looking forward to another profitable year, enhanced by the acquisition of Bishop Skinner.

While we continue to work hard at trying to source our own acquisitions, we see our relationship with IMAS as a key part of our acquisition strategy. Having appointed an adviser, it is an indication to us that the vendor is serious about selling and is not just dipping a toe in the water, and we know that the background information and disclosure information on the seller will have been well-prepared.

We can rest assured that the business has not been trawled around the market as we know that IMAS rigorously preselect the short-listed buyers that they believe will be a good fit, and that the vendors can keep their eye on the day-to-day running of the business, protecting its value while the deal is under way.

THE DEAL-MAKER: OLIVER LAUGHTON-SCOTT, IMAS

Brokers spend their lives advising other people on the best forms of risk management. Yet, when they come to sell their own business - in many cases their most valuable asset - they often seek no advice. While there are enough potential buyers in the market that someone to enter into talks with will usually be found, it is important to ensure that this company is the best fit for your business.

Talking to one buyer, which many brokers do, puts the ball firmly in the buyer's court, putting them in control of the process. Signing an exclusivity letter could tie you to that buyer for months, yet they may be talking to three or four other parties at the same time and simply keeping you on the hook in case another deal falls through at the last moment. In this situation, the seller has no one to turn to for advice.

One of the classic traps for sellers is to commence talks without an adviser with the intention of seeking guidance if things become difficult. What inevitably happens is that there is never a right moment. Once people have started to negotiate they perceive that taking independent advice implies a weak negotiating position. Interestingly, it is the better-quality businesses that appoint advisers. They value their own services and appreciate the benefit of expertise, both their own and other people's.

Good purchasers come in all shapes and sizes, and it is wrong to assume that the higher-profile buyers are the ones that are going to come up with the best values. The higher-profile buyer is well-practised and will more likely have more than one purchase on the go - in this way it can run two businesses against each other and negotiate the terms down knowing there are alternatives.

In this case, Tim Hall underwent the process of both responding to an individual approach and then appointing advisers. Not only was the outcome successful after advice was sought, but he sold to a broker he would have otherwise discounted without the input of advice based on detailed knowledge of all the buyers and their appetite and ability to consummate a transaction.

We have known Bishop Skinner for many years and had previously offered the firm informal advice to dispose of its financial services business and property interests should it want to consider a sale. When Bishop Skinner began working with us, we identified the fit with Stuart Alexander immediately.

Stuart Alexander likes and understands schemes business and Bishop Skinner's yacht scheme is the jewel in its crown. We had sold other businesses to Stuart Alexander in the past that were similar to Bishop Skinner culturally, so we believed there would be a good cultural fit. Bishop Skinner is a classic broker with a small team of highly experienced individuals who have been looking after their clients for many years most effectively. Staff seldom move and clients very much appreciate the continuity of service.

To overcome initial concerns about Stuart Alexander, we assured Tim Hall that it could afford the transaction, was a serious buyer that we had sold businesses to before, it stuck to its word and that the business fit would be good. We encouraged Bishop Skinner's management team to meet the full Stuart Alexander management team to get a feel for the people. Businesses often have perceptions about other companies gained through the press or market gossip, but these are frequently proven to be incorrect after a little investigation. Companies get sold but it is the people that do the deal. Trust is one of the key ingredients of any deal and, given the parties had worked together, albeit in the past, this was readily established.

The process of analysing the long list and reducing it down to the short list gave us additional insight into the culture of Bishop Skinner. Experience shows us that, when a seller says it will not sell to a particular party, this is often exactly who they do sell to. Typically, this is because businesses are often competitors and a fierce rivalry has developed. However, such businesses will often have the same business practices and ethics and, if a meeting can be set up, both sides are often amazed at how much they have in common. The skill in producing a list is in identifying the small number of buyers that are actually right for the deal, not just a shopping list of brokers' names.

Once offers have been sought, we ensure that they have been properly evaluated in both quantum and structure, as selling a business is not just about the top-line price but all the detail that goes behind this. We then advise the seller on the nature of the different offers and work with them to balance up with whom they should proceed in discussions. As the discussions progress, our role is to ensure communication between all parties continues and to run the process to the seller's, not the buyer's, advantage.

We ensure that the negotiation does not falter or stall to the point where it becomes irreconcilable. However, at times, we have had to advise our clients to pull out of a deal. Thankfully this did not occur in this case and the deal concluded to a satisfactory outcome for all parties involved.

Peoples' lives - those of both vendors and staff - are changed when a business is sold. Normally it is for the better, as vendors can plan the next phase of their lives and staff join a business that, typically, is more dynamic and has greater opportunities. The purchaser who is willing to pay more often values all parts of the business, particularly the staff. For us, a good deal is one where we get not only a good price, but one where the staff are pleased to see us post-transaction.

No transaction is easy or the same as any other and it is our job to get the best deal possible for our clients. While financial considerations are high on any seller's list, as this deal illustrates, the top price available does not always represent the best deal.

Getting the business and cultural fit right is more important in the long run for a variety of reasons. Looking after your staff and ensuring a business that you may have built up and been involved in for many years prospers is just one, and this too comes back to financial considerations. The vast majority of deals involve some type of earn-out scenario based on business performance going forward. The more successful the business is under its new owners, the higher the full and final consideration received is likely to be.

Two weeks after completion I was visiting Stuart Alexander's office and recognised the Bishop Skinner receptionist working at full tilt. I asked her how it was going and she said: "It's busy, but I'm enjoying it. Lots to learn but everybody is very helpful and kind." Addressing Stuart Alexander's receptionist, I enquired after Tim Hall. "Lovely man," came the reply. I inwardly smiled, the cultural fit seemed pretty good to me.

- The company acquired is the London-based Bishop Skinner & Co Ltd, and in no way involves or affects Newcastle-based Bishop Skinner Insurance Brokers Ltd, which is a completely separate business.