Is Internal Perpetuation a Thing of the Past?

The American dream is based on the idea that anyone can achieve success through hard work, determination, and perseverance.

Starting a business is often considered the quintessential example of the American dream, where an individual can be their own boss, control their destiny, and build something important and valuable. For many, that also may ultimately lead to an opportunity to cash in and sell that business. However, in the insurance brokerage industry, this is sometimes considered “selling out.”

Brokerage owners have always taken some pride in proclaiming that their business would remain independent by promising they would perpetuate to the “next generation” of employees. But more often than not, this has become a hollow promise.

In this environment of high valuations and heavy consolidation, the topic of internal perpetuation has become a lower priority for firms. That is primarily due to the valuation gap that continues to widen, making the prospects for remaining independent less appealing. A firm can fetch upward of 50-100% more if sold externally than its potential value in an internal sale. Selling internally also typically includes more risk to the selling shareholder as they usually will hold a note on their own buyout.

Most owners who believe they may want to perpetuate still have not prepared to make continued independence possible. Perpetuation requires ongoing commitment and investment in people and processes—a commitment that often gets pushed aside or delayed for other priorities. Firms need to have strategies around building a sales culture, recruiting top talent, creating training and mentorship programs, and retaining top employees through ownership opportunities. When you do all of those things, you must have willing buyers within your colleague base who are risk-takers. They have to want to buy your equity.

This realization of the evolving marketplace, compounded by the level of effort to ensure independence, has shifted owners’ mindset. Many still may believe they can remain independent, but few are proclaiming it openly for fear of breaking their promise to employees.

This raises a question: why is selling your firm externally still considered “selling out?” Today, average firms are growing by double digits each year, and it is becoming more challenging to remain competitive. Firms need ways to grow, through a combination of specialization, geographic expansion, and acquisitions. The valuation gap isn’t the only reason to sell—owners are selling or partnering with other firms because it allows them to remain competitive and to sustain growth.

The independent agency model isn’t going extinct. For every firm that sells, a new agency pops up. But when that agency reaches a certain size or reaches a point where the business must take on additional risk to grow further, decisions need to be made. Owners are no longer talking about internally perpetuating their business like they used to. But that’s OK. Selling your business or taking on a capital partner is just part of the cycle of the business owner’s American dream.

M&A Market Update

As of Aug. 31, 2024, there were 406 announced M&A transactions in the United States. Activity through August trended higher than in the same period of 2023, during which 379 transactions were announced.

Private capital-backed buyers accounted for 304 of the 406 transactions (74.9%) through August. Independent agencies were buyers in 58 deals, or 14.3% of the market. Transactions in which banks were buyers continued to fall, with only two acquisitions to date in 2024—down significantly from 18 deals in 2022 and nine deals in 2023.

The top 10 buyers accounted for 50.7% of the 406 announced transactions, while the top three (BroadStreet Partners, Inszone Insurance, and Hub International) generated 26.8% of the deals.

Notable Transaction

• August 6: King Insurance Partners has acquired Lincoln Insurance Group, an independent insurance agency based in McDonough, Georgia, with over 70 years of experience. Lincoln Insurance Group provides auto, home, life, and business insurance through partnerships with multiple carriers.
• August 15: PCF Insurance Services, a top 20 U.S. insurance brokerage, has acquired Asset Insurance Agency, a firm based in Peabody, Massachusetts. PCF Insurance CEO Felix Morgan said the acquisition aligns with the company’s strategy by adding an experienced team that shares its collaborative culture and commitment to growth and service excellence. Asset Insurance Agency offers auto, home, commercial, and life insurance across six states in the Northeastern United States and Florida. Through this acquisition, Asset’s clients will gain access to PCF’s broader range of coverage options, competitive pricing, and additional services such as risk management and claims advocacy.
• September 1: Ryan Specialty, a leading international specialty insurance firm, completes its acquisition of certain assets of Greenhill Underwriting Insurance Services from Alera Group. Greenhill, founded in 2014, is a technology-enabled managing general underwriter specializing in small-to-midsize allied healthcare policies, including coverage for home healthcare, physical therapy, and social service organizations. Greenhill operates in the surplus lines market and uses its proprietary technology, Triton, to manage the entire policy life cycle. Greenhill will join Sapphire Blue, Ryan Specialty’s healthcare managing general underwriter.