After the founding of Sunstar Insurance Group around 11 years ago, CFO Chris Parcell says the company started doing strategic acquisitions. To date, he says they’ve closed just over 50 deals — 23 of which happened in the past three years — and more are in the pipeline.
At the St. Louis Smart Business Dealmakers Conference, he talked about how they group acquisitions into three buckets. When they acquire a large agency in a new geographic area, they consider that more of a platform, even if it's not a platform size, because it opens up a new geography. That due diligence, he says, is much more involved than the diligence for a tuck-in acquisition and the plan is to roll an agency into an existing hub. The latter are more about understanding cash flow. Are they cash flow positive? Are there some areas that they can cut costs and improve EBITDA through the acquisition of that tuck- in?
In the cases of independent brokers, they’ll often buy the book and roll them in, which he says is highly accretive from an EBITDA perspective.
Grouping the acquisitions into different buckets means there's different levels of due diligence for each.
“For our large hub, strategic platform acquisitions, those are always done externally,” he says. “Our board requires it, our debt covenant requires it, and so it's a much more involved process, usually taking about 60 to 90 days. When we're buying a small tuck-in or a book, we can get that done in a matter of weeks and get it closed quickly.”
Because of the company’s size, they're able to negotiate better contracts with carriers so that they can realize higher revenues simply because of the size of their agency as a whole.
“We do all asset deals, so we're not taking on any legacy contracts that somebody may have,” Parcell says. “We roll them into our contracts and then continue to leverage our scale to grow that increased revenue.”
Integrating these companies into their portfolio begins on day 1.
“We take great pride in that every one of our acquired agencies is on our platform, and we start that process day one with people,” he says. “And that usually lasts four to six months, depending on how long it takes for us to get their agency management system, so their operating system, over to our platform. Becoming one of our Sun Star agencies, it's a conversation ender if they don't want to move over to our platform. That allows us better visibility into our data, which we believe is invaluable in terms of continued value creation with our carriers and understanding exactly how much business we've got in different in-market segments.”
Growth through acquisitions means really focusing on people.
“It's easy to go by revenue, but you're not always successful when you're chasing revenue,” Parcell says. “In the 50-odd deals that we've had, looking back, there's probably one that we wouldn't do again because of the people that were involved. The business ended up being successful, but it was painful to get there.”
He says in all of the deals they’ve done, they’ve never asked a selling principal to reduce headcount as a condition of the acquisition. They bake their earnings into the pricing, so if their EBITDA is not what they want it to be, the price reflects that.
“So, it's really just taking a disciplined approach, not chasing revenue, chasing people, and making sure that it's a good fit,” he says. “We've walked away from deals because the personal fit wasn't there.”
