No One Is For Sale, Until the Day You Are
Do you have a choice to sell? Many don’t.
There is a stigma in the industry around selling. No one wants to admit they might consider selling one day.
Their employees don’t want to work for “Corporate America.” They like the flexibility of working for a small organization. This translates to concerns deep down they don’t want their commission levels reduced to industry norms and they don’t want to be held accountable.
We believe roughly 75% of agency principals who want to remain independent—or better yet strive to remain independent—will not be successful and will ultimately sell. These sales will occur for three macro reasons: (1) it’s really hard to grow, (2) aging never stops, (3) valuations are crazy right now.
Predictable profitable organic growth is almost as elusive as finding an agency owner who is honest about the likelihood of selling one day. The reality is organic growth is tough. It takes a real commitment to consistently write 15%-20% new business as a percent of prior year commissions and fees. Constant producer recruitment, hiring, training and mentoring are a necessity to build an organic growth engine with staying power. Then once you have enough “horses in the stable” you are left to compete with larger national or regional brokers—firms that have more name recognition and resources to provide higher levels of service and support to clients.
Throw in a market that is showing rate changes that are soft and you really are in a daunting position to consistently outpace the marketplace for growth.
The age issue is an easy one to address. The majority of owners are baby boomers, and it’s getting close to retirement age. The closer ownership gets to their earmarked retirement, the more likely we are to see more sales and less perpetuation. Owners typically like their money up front and not seller-financed over 10 years. The current generation of owners must be staunchly committed to internal transfer for there to be a chance for success.
Lastly, the valuations in today’s marketplace are rising. In our annual M&A Executive Report in this month’s issue, you will see average multiples crept up in 2014. Our 2015 forecast predicts a steady state for valuations with a potential increase based on demand from new buyers in the marketplace. It turns out, at least over the first few months of the year, valuation multiples are continuing their climb. Competition is fierce for quality deals. This is defined by buyers searching for leadership. Aging principals are affecting leadership across regional and national brokerages. Additionally, with the continued influx of new buyers in the marketplace, it is hard to put a premium on talented leadership. It is hard to tell if valuation levels are a bubble that will burst at some point, but for now they continue to rise to levels not seen before.
Buyers are searching for leadership.
So while it is somewhat taboo for insurance brokerage principals to indicate they might consider selling, take solace in the fact most will. Plus, you should not feel the need to be apologetic for striking while the iron is hot and capitalizing on an incredibly valuable asset.
Market Update
February was a bit of a slow month with only 18 announced deals—the lowest monthly total since October 2013. The year-to-date total is 58, which is being propelled by a number of late January deal announcements. March has also started with a flurry, likely to give a strong close to the first quarter.
AssuredPartners has jumped out of the gate with five announced deals in the first two months of the year. Several firms have completed two deals, including Hub International, Arthur J. Gallagher, Leavitt Group, Brown & Brown and Towne Bank. Forty-one other firms completed one transaction.
A majority (35) of this year’s deals are p-c only firms. There were 17 multiline firms acquired and six employee-benefits-only firms. Retail brokerages have accounted for 48 of the sales (83%), and 10 were wholesale, of which eight were program administrators.
