Industry the M&A 2018 issue

‘Same Old’ Economy?

M&A continues to heat up, but the long-term outlook throws some headwinds in the face of this continued pace.

Sponsored by MarshBerry Posted on March 30, 2018

Whether we are headed into a hardening market in 2018 remains an open question to MarshBerry for a number of reasons.

Overall, the p-c insurance industry remains very strong on a relative basis, with all-time highs for policyholders surplus, which stands at $719.4 billion, and ratio of net premiums written to surplus, which was 0.76 as of September 2017. The industry appears to be well capitalized and able to withstand large payouts. The headwinds and potential trends toward a hardening market include: (1) a significant increase in catastrophic claims, (2) larger underwriting losses, and (3) a rise in premium rates, especially for personal lines and commercial auto.

Catastrophe. Although it is too soon to finalize full-year 2017 U.S. catastrophe claims, the impact of hurricanes and California wildfires and mudslides is expected to lead to insured losses in excess of $90 billion. This would represent the highest level in the past 25-year period.

Underwriting. The combined ratio jumped to 104.1 for the first nine months of 2017, up from 100.7 at year-end 2016, according to the Insurance Information Institute. The significant increase in the industry’s underwriting loss is due to high claims and claim-adjustment expenses as a percent of earned premiums. This is not a surprise given the year’s catastrophe claims.

Premium Rates. Compared to prior years, we saw in 2017 a decrease in the positive development of loss and loss-adjustment-expense reserves among U.S. p-c insurers. Higher premium rates and pricing looking forward is supported by a combination of lower reserve levels and higher reinsurance rates based on U.S. natural catastrophes. This is especially the case in certain lines of business such as personal lines and commercial auto, as carriers might be compelled to readjust pricing for risk and exercise greater underwriting discipline.

Private Equity Continues to Drive M&A

The merger and acquisition space continued to see high levels of deal activity in 2017, resulting in a record year. Within its proprietary tracking deal database, MarshBerry recorded 557 announced brokerage transactions, up 26% year over year and up 22% from the prior record-breaking count in 2015 of 456 deals.

Private-equity backed buyers—including those with private capital backing—continue to be the main driver of deal activity and value, representing 57% of all deals (316 deals) in 2017. Out of the top 21 most active buyers (defined as those completing five or more deals in the year), which represented more than 61% of total deal activity, only six do not have PE or private capital backing.

In fact, again in 2017, nine of the top 10 buyers were PE-backed, including those with private capital backing (read more on that in the “New PE Players” story). There has been a significant increase in PE-backed buyer activity during the past 10-plus years. Private equity represented just 7% of deal activity in 2007.

Interestingly, the number of PE-backed buyers in the marketplace in 2017 was similar to that of 2016, with 26 in 2017 compared to 27 the previous year. However, these buyers were more active in 2017 and completed 316 total deals, up from 242 in 2016—an average of almost one per buyer, per month.

The top 11 PE-backed buyers (including a tie for 10th place) represented 48% of the total 2017 deal activity in the industry and 85% of the total private-equity backed deals. Although there are indications that interest rates are on the rise, the availability and relatively low cost of capital continued to help drive PE-backed buyers to target insurance brokerages at an accelerating rate, driving activity within the industry overall. With investors searching for higher yields in a low interest rate environment, we are seeing that there continues to be heightened interest and demand among private equity in the insurance brokerage space.

Leading Acquirers

The top five buyers in 2017 included four of the top buyers in the prior year. Of the five top buyers, one does not have private equity backing. The top three buyers are identical to 2016.

The top five most active buyers accounted for 35% of all transactions in 2017 (195 of 557).

Acrisure was the top buyer for the third year in a row with 72 announced deals. Acrisure typically does not announce the target name of any acquisitions, and 2017 was no exception—only a handful of targets were named. It is likely that Acrisure successfully completed more than 72 transactions during the year.

Hub announced 42 U.S. deals and five deals in Canada, bringing its total North American deal count to 47. Its U.S. deal count was up more than 30% from last year’s 31 deals. Almost 17% (7) of its 42 U.S. transactions were managing general agents or non-traditional brokerages, which have made up Hub’s historical acquisition activities. Nearly 25% of its announced U.S. transactions were California-based agencies (10 of 42), but interestingly, the next two most active states were Alaska and Maryland, where Hub completed four acquisitions each.

BroadStreet Partners has been consistent the past few years, with 26 deals announced in 2015, 28 in 2016, and 32 in 2017. BroadStreet has a somewhat unique capital structure with the Ontario Teacher’s Pension Plan as its main source of private equity funding (among other minority investors), although these medium- to long-term investors are becoming more prevalent within the space. The firm has completed approximately 286 transactions including core agencies and tuck-ins since 2001, with a compound annual growth rate since 2010 of 23%.

Gallagher reported 25 U.S. deals during 2017, tying for the fourth most active buyer in the U.S. market and earning it a place back among the top five most active buyers for the first time since 2014. The agency indicated on earnings calls throughout the year that competition remains high for deals and, through the third quarter 2017, it had paid a blended rate of about 8x EBITDA.

AssuredPartners also announced 25 U.S. transactions. Completing a reported 190-plus acquisitions since its founding in 2011, AssuredPartners has grown annualized revenue to more than $940 million. The company has 200 offices in 30 states and London.

First-Time Acquisitions

We also saw continued interest from PE firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following private-equity backed buyers:

Baldwin Risk Partners (four deals) was founded in 2012 as a holding company above Baldwin Krystyn Sherman Partners, a middle-market multi-line insurance brokerage and consulting firm that was founded in 2006. See “New PE Players” for more on Baldwin Risk Partners and its funding structure.

U.S. Retirement Partners (two deals) is a national financial services company that specializes in employer-sponsored retirement and financial planning needs. It entered into the brokerage acquisition marketplace in 2017. Its private equity sponsor is Centre Partners, which invested in the firm in 2008.

AIMC (one deal) serves the senior market as a national developer and distributor of Medicare Supplement products. It merged with Integrity Group, a broker of L&H insurance products with financial backing from middle-market PE firm HGGC.

DOXA Insurance Holdings (one deal) is entirely focused on acquiring MGAs with less than $75 million in annual premiums. DOXA Insurance Holdings is backed by private funds and investors.

Gravie (one deal) entered the brokerage M&A market with its acquisition of Breitenfeldt Group in 2017. It received private funding from several sponsors during the year.

In addition, the following firms changed or added new private equity sponsors during 2017:

USI Holdings was backed by PE firm Onex Corp, which announced in January 2017 it was exploring the sale of USI. It hoped the deal would value the firm at $4 billion—nearly a 12x multiple based on reported EBITDA of $347 million in the 12 months leading up to the end of the third quarter of 2016.

In May 2017, KKR and Caisse de dépôt et placement du Québec (CDPQ) announced they would acquire USI from Onex, as equal partners, at a $4.3 billion valuation. CDPQ is a long-term institutional investor that manages funds primarily for public pension plans, which indicates there is not likely to be a quick flip of the investment as we typically see with more traditional private equity sponsors. We believe that this may signal an emerging trend of buyers with longer investment time horizons entering the insurance brokerage market. See “New PE Players” for more.

OneDigital Health and Benefits entered into a new sponsorship with New Mountain Capital, which purchased a majority ownership from Fidelity National Financial Ventures in mid-2017. OneDigital is exclusively focused on employee benefits and support, with more than 9,000 employees and more than 35,000 companies as clients.

NFP Corp. entered a definitive agreement with HPS Investment Partners to make a substantial minority investment in NFP. Announced in 2016, the deal successfully closed in February 2017. HPS invested $750 million in NFP. Madison Dearborn Partners, NFP’s previous sponsor, maintained its controlling stake in the company.

First-Time Acquisitions

DOXA Insurance Holdings (one deal) is entirely focused on acquiring MGAs with less than $75 million in annual premiums. DOXA Insurance Holdings is backed by private funds and investors.

Gravie (one deal) entered the brokerage M&A market with its acquisition of Breitenfeldt Group in 2017. It received private funding from several sponsors during the year.

In addition, the following firms changed or added new private equity sponsors during 2017:

Independent Brokerages Edge Up Slightly

Independent agencies and brokerages completed 136 deals, or 24% of all activity, in 2017. It was proportionately the same rate of acquisition as in 2016 (24%) but slightly higher in absolute terms from the 107 deals completed the prior year. There were 106 buyers (up from 83 in 2016), approximately 14% of which completed multiple transactions and 67 that announced their first acquisitions in 2017.

Cross Insurance, based in Maine, announced five deals in 2017 (one fewer than the previous year)—three located in Massachusetts and one each in Maine and New Hampshire. Cross is family owned and operated and has historically focused on the New England area. Cross has “absorbed” over 120 operations since its founding in 1954.

World Insurance Associates, based in New Jersey, announced five transactions in 2017 (in line with its five announcements in 2016), continuing its expansion of retail agencies in New Jersey and New York. Four of the five agencies acquired in 2017 were multi-line agencies. World Insurance Associates specializes in transportation, hospitality, coastal properties and high-net-worth individuals.

Ryan Specialty Group, based in Illinois, also announced five acquisitions during 2017, up from two in 2016. RSG is a specialty distributor, focused on the wholesale and MGA space. All five of its acquisitions during the year fell into these categories (four MGAs and one wholesaler).

Leavitt Group Enterprises, based in Utah, announced five acquisitions during the year, which varied across the western states of Washington, Colorado, Texas and California and included p-c firms, employee benefit firms and multi-line agencies. Leavitt is a top 100 p-c agency, with p-c revenues of almost $150 million in 2016.

These independent agencies each announced three transactions in 2017:

Florida-based Acentria Insurance completed three deals in Florida.
New York-based Evergreen P&C Insurance Agency completed one deal in Florida and two in Nevada.
Arizona-based RightSure Insurance Group completed one deal in California and two in Arizona.

Seven other buyers reported two acquisitions each in 2017, with newcomers including Linnett Group and Hanson Insurance Group, which both announced acquisitions for the first time in 2017. We believe that the increase in the number of buyers in this category indicates that, despite the stiff competition in terms of agency valuations from the private-equity backed buyers, independent agencies are continuing to find ways to convince sellers there is more to life after the deal than purchase price.

Public Brokerage Share Remains the Same

Public brokerage activity was up 12% in total deal count during 2017 (37 announcements versus 33 in the prior year). However, the overall proportion of deals represented by public brokerages did not change from 7% in 2016. There were four public brokerages in the market during 2017 (unchanged from 2016 and 2015), compared to nine public brokerage buyers in 2005 and more than 100 independent buyers in the marketplace in 2017.

Gallagher announced 25 U.S.-based transactions, up from 23 in 2016. Last year was its most active acquisition year since 2014 and earned it a place among the top five most active buyers during 2017. Gallagher also announced eight international brokerage acquisitions, bringing the total count to 33 brokerage acquisition announcements.

Brown & Brown announced seven transactions during the year, a step higher than the four announcements from 2016.

Marsh & McLennan Companies completed four U.S.-based transactions in 2017, compared to five reported deals from last year. All four were completed by subsidiary Marsh & McLennan Agency, which is focused on the middle market.

The fourth public brokerage, CBIZ, completed only one deal in 2017, the same number as in 2016.

While activity was suppressed for some buyers, we expect public brokerages to continue seeking external growth opportunities to supplement their organic growth rates and meet investor expectations. The newly minted tax law has brought lower corporate tax rates that should have a positive impact on the after-tax cash flow of the public companies. Thus, we expect them to be more competitive in the market.

Rounding Out the Field

The buyer segment of Insurance Carrier & Other includes PE firms (direct investments from private equity firms themselves and not the previously described acquisitions through PE-funded insurance brokerage aggregators), underwriters, financial technology firms, specialty lenders and other unclassified buyers. Activity within this buyer group increased to 46 deals in 2017, up from 39 in 2016; however, proportionately, buyers in this group did not change much, representing 8% of deals in 2017 compared to 9% in 2016.

PE companies accounted for 15 deals within this category, including some PE firms acquiring their second or third insurance brokerage business.
Insurance carrier buyers completed 18 deals, compared to 13 the prior year.
Non-PE, non-insurance companies (mostly credit unions, private investors and other undisclosed buyers) represented 13 deals within this category.

Banks and thrifts completed 22 acquisitions in 2017, largely unchanged from the 22 announcements in 2016, but represented only 4% of the total deal count, down from 5% in 2016. Acquisition activity in this segment has steadily declined over the past decade, as banks have either typically divested themselves of insurance operations or stopped acquiring at the same pace.

There were 19 bank acquirers in the market in 2017 (seven of which announced their first transaction), with only three completing multiple transactions.
Fifth Third Bancorp, Cashmere Valley Bank and OneGroup NY announced two acquisitions each in 2017.

International Activity Down

International M&A activity was not as robust as the domestic market during 2017. The total number of recorded announced international transactions, completed by both domestic and foreign buyers, during the year was 80, down from 98 in the prior year. There were 44 unique buyers internationally in 2017, down from 63 in 2016.

Fifteen buyers were based in either the United Kingdom or the United States, representing nearly 70% of the international deal activity.
Of the 80 deals announced internationally, 37 were independent agency/brokerage acquirers, 29 of which were PE-backed. In all, PE-backed agencies represented 36% of the international deals in 2017, far less proportionately than the domestic market.
Public brokerages had a larger share of the market, making up 24 of the acquirers, or 30% of all deal activity.

Aon and Gallagher were the most active acquirers internationally, with nine and eight announcements respectively. One of the larger transactions announced during the year was Aon’s purchase of Netherlands-based Unirobe Meeùs Groep. Announced in August and completed in November, the acquisition was valued at €295 million, or roughly $350 million. Aon noted that the acquisition would help strengthen its small to midsize enterprise and consumer capacities within the geography.

The United Kingdom was the most active M&A market outside the United States and was home to 41 of the 80 target companies, or just over half of all international deal activity. Several holdings of Tosca Penta Endeavour Limited Partnership, a PE-backed firm, completed six of the 41 U.K. acquisitions, making it the most acquisitive in the geography. Nevada Investments Topco Limited (under the Finch Commercial Insurance Brokers Limited name) and Aon rounded out the top three buyers in the United Kingdom, with four and three acquisitions during the year, respectively.

Canada was the second most active venue during the year, though a distant second to the United Kingdom, with nine deals. Hub acquired five of the nine targets in Canada. Founded by the merging of 11 brokerages in 1998, Hub has its original roots in the Ontario and Quebec provinces of Canada.

Costs Drive EB Acquisitions

In 2017, employee benefits and consulting (EB) firms were involved in more M&A transactions than in any of the prior five years, at 123 deals (with another 144 deals involving multi-line firms). Ten acquirers completed two thirds of the announced EB transactions in 2017, with the five most active acquirers closing more than half of the announced transactions.

The top buyers of EB firms in 2017 included Acrisure, Hub, OneDigital Health and Benefits, Alera Group, and NFP and Gallagher (tied for the 5th most active acquirer). The next five most active buyers represented roughly another 15% of the transactions.

Employee-benefits firm owners who consider selling may be motivated by a number of things, including:

Continued Market Uncertainty. The Affordable Care Act did not put EB firms out of business, but the lack of solutions to address the key problems related to the cost of healthcare have not been addressed, and that leaves the industry vulnerable to continued politicking. As a result, while the EB market continues to evolve, it is considered less stable by some, as compared to property-casualty, and that continues to drive many owners of well run, high-quality EB firms to consider a sale of their firm. That sale brings diversification and, frequently, access to p-c markets and the ability to cross-sell, as well as access to additional EB resources.
Lack of Investment in New, Competitive Resources. The vast majority of employers with more than 50 workers continue to offer health benefits (90% of firms of 50-99 workers and 96% of firms with 100 or more workers), according to a survey conducted by the Kaiser Family Foundation in 2017. As health insurance costs continue to rise and premiums continue to increase, EB advisory firms are looking for ways to help employers keep costs in check and still provide a competitive benefit plan to their employees. This has led advisors to move from recommending fully insured medical plans as the bedrock of the benefit plan to offering more creative solutions, often involving self-funded plans, partially self-funded plans and captives, and tailored offerings of ancillary benefits and voluntary benefits.

As a trend, employee benefit plans are becoming more comprehensive of employee well-being and may include employee financial wellness, personal information protection and identity theft protection, and flexible work arrangements, in addition to the traditional medical coverage, employer-paid ancillary coverages, and voluntary benefits.

New Buyers with a Compelling Story. The number of buyers of EB firms has held consistent over the last few years, with Hub and Gallagher repeatedly in the top five. In December 2016, PE-backed Alera Group emerged on the scene by bringing together 24 independent agencies. Alera completed eight EB deals (of 15 total deals) in its first 12 months of operations, which is no small feat. This past year brought an additional uptick in activity in the employee benefits space from Acrisure, with 24 employee benefits deals (of 72 total deals) compared to three EB deals in the prior year, and from newly recapped EB firm OneDigital, with eight deals compared to three employee benefits deals in the prior year. The most active buyers, which generally have large EB practices, have developed solutions and resources for their broker base nationwide, making them attractive to smaller firms struggling to finance and develop the resources required in the current competitive landscape. Buying firms continue to look for high-quality EB firms to join their organizations. High-quality firms typically have consistent organic growth, a youthful ownership group, strong operating profit, a sophisticated client service model, and/or some unique attribute to add to a larger organization, such as geographical presence, specialty expertise or programs, an innovative leadership team, or a unique approach to the market. These types of firms typically command higher valuations

Specialty Distributors Remain Attractive

Entering 2017, the environment for specialty distributor M&A was muted due to concerns about, among other things, the economy, political and regulatory uncertainty, market volatility and valuations. Those concerns waned as the year progressed due to the increasing prospects of significant pro-business legislation, including tax reform, which materialized at the end of the year.

As a result, deal flow in 2017 went gangbusters. Of the 557 announced transactions in 2017, specialty distributor deals represented approximately 13% of this total, or 74 deals. In absolute terms, the number of specialty distributor deals in 2017 (74) was up 7% year over year; however, on a percentage basis, 2017 continued a decreasing trend of specialty distributor deals as a percentage of total announced transactions.

Specialty Distributor Transactions (% of Total)

Year-end 2017: 13%
Year-end 2016: 16%
Year-end 2015: 18%
Year-end 2014: 20%

Notwithstanding this trend, we are seeing that specialty distributors continue to rank high on acquirers’ depth charts for a multitude of reasons, including:

Inventory. Inventory of sellers remains high, particularly property and casualty sellers.
Age. The average age of owners exceeds 54 years, and many baby boomers lack functional perpetuation plans.
Valuation. The delta between internal and external valuations is significant.
External factors. The economy is robust, and interest rates remain relatively low.
Demand. Investors are plentiful and capital abundant.
Cost of capital. Debt capital remains cheap and access thereto easy.

Consistent with recent years past, private equity represented the largest buyer group of specialty distributors in 2017. Of the 74 deals, PE and/or PE-backed brokerages represented 37, or 50%. Private equity is now a household name with potential sellers.

Furthermore, many established consolidators are now pursuing investments in the specialty distribution sector. Traditionally, only a few consolidators—namely Gallagher (via Risk Placement Services), Brown & Brown, and Ryan Specialty Group—put their proverbial money where their mouths were in terms of specialty distribution platforms. Their consolidator competitors seemingly kept to the retail sector. However, this trend is noticeably transitioning. For example, last year we saw the following consolidators (all PE backed) acquire specialty distributor operations:

Acrisure
Alliant Insurance Services
AssuredPartners
Hub (via Program Specialty Group)
NFP
Risk Strategies Company.

Specialty Distributor Top Buyers

The top five buyers of specialty distributor operations accounted for 23 (of 74) deals, representing 31% of the total specialty distributor deals consummated in 2017.

Leading the charge on the buy side was Hub’s Specialty Program Group, the specialty distribution arm of Hub, with six deals. Next in line was Ryan Specialty Group with five deals, followed by NFP, Assured Partners, and US Risk, each with four deals.

Specialty Program Group (“Hub SPG”) = 6 deals
Ryan Specialty Group = 5 deals
NFP = 4 deals
AssuredPartners = 4 deals
US Risk Insurance Group (“US Risk”) = 4 deals

Program Administrator Top Buyers

All six of Hub’s specialty distributor deals last year represented program administrators with significant contract-binding authority commission revenues. In other words, they took a pass on the traditional wholesale brokerage model, thereby ameliorating channel conflict with their large retail operations. Hub was consistent throughout 2017, closing one or more transaction(s) each quarter end. Hub’s acquisitions included a diverse mix of industries, p-c lines of coverages, and geographies, including:

Transportation commercial lines via the acquisition of Paul Hanson Partners Specialty Insurance Solutions, based in California
Financial and professional liability covers via the acquisition of Capitol Special Risks, based in Georgia.

Sharing the silver medal in terms of program administrator deals was the traditionally retail-focused consolidator Assured Partners, which made a large splash in the program administrator space with four acquisitions, and serial acquirer Ryan Specialty Group, also with four deals. Rounding out the top five were retail consolidators Acrisure and NFP, each with three deals.

Specialty Program Group (Hub) = 6 deals (2 deals in Q4)
AssuredPartners = 4 deals (3 deals in Q4)
Ryan Specialty Group = 4 deals (3 deals in Q1)
Acrisure = 3 deals
NFP = 3 deals

Wholesaler Top Buyers

On the wholesale side of the equation, AmWINS Group, Gallagher, and US Risk each consummated two wholesale brokerage acquisitions.

Transaction Pricing and Structure

2017 wrapped up another seller’s market. High values remain prevalent, and the leveling of prices we saw in 2016 gained further momentum with platform, stand-alone and roll-in transitions all showing an increase in average total realistic purchase price multiples. However, in conjunction with the increase in purchase price multiples was an increase in the required growth rates to achieve the earnouts seen across most platform and stand-alone acquisitions.

Pricing Structure Breakdown

Two forms of purchase price are generally referenced in the industry: multiples of EBITDA and multiples of revenue. Here, we refer to multiples of EBITDA. To analyze transaction pricing, we’ll break the price down into three key components:

Base Purchase Price: The dollar amount paid at close plus the live-out the seller is expected to receive.

Paid at Close: The amount of proceeds paid at closing, including any escrow for potential indemnification items.

Live-out: The amount a buyer may initially hold back but which is paid as long as the seller’s performance does not materially decline. This may also be paid at closing but could be subject to a potential adjustment. If the live- out is not paid at closing, this payment is usually paid within one to three years, contingent upon delivering on the seller’s pro forma revenue or EBITDA.

Realistic Earnout: The anticipated purchase price to be achieved in the future based on a number of factors including seller historical and expected performance, buyer and seller realistic discussion of earnout metrics, etc.

Realistic Purchase Price = Base Purchase Price + Realistic Earnout

Maximum Earnout: The additional earnout above the realistic earnout that, if achieved, would generate the maximum possible earnout payment.

Maximum Purchase Price = Base Purchase Price + Realistic Earnout + Maximum Earnout

Purchase Price Trends

For sellers, a key goal is to maximize the purchase price paid up front, or base purchase price. Buyers realize that how a company performs after the transaction is critical. The earnout, or “at risk” component, should fairly reflect the risk profile the buyer supposes that, for the seller, will ultimately help drive shared risks and rewards.

>> Earnout: A provision of the purchase agreement that states the seller is entitled to future compensation if it achieves certain goals, typically related to growth of revenue or EBITDA. In past years, stemming from the overall market- and industry-specific conditions, buyers sometimes reduced the base purchase price and shifted a larger portion of the total purchase price to the earnout. We saw this shift most recently in 2012.

However, up until last year, we saw continued increases in the amount sellers were paid up front, with gradual increases in the earnout potential as well. This past year showed a renewed increase in both the base purchase price and the earnout, with a more notable shift seen in the platform and roll-in acquisitions. However, buyers are also expecting greater growth hurdles for sellers to achieve higher earnouts due to the increase in base valuation.

>> Pricing Ups and Downs: In 2017, the average base purchase price increased nearly 0.24 times EBITDA (or 3%) to 7.97 times EBITDA. The average realistic purchase price was 8.84 times EBITDA in 2017, up 0.31 times EBITDA (or 4%) from 8.53 times in 2016. The additional maximum earnout potential in 2017 was slightly lower than last year (0.07 times, or 4%), resulting in an average maximum purchase price of 10.37 times EBITDA in 2017, which in total is up 0.25 times (or 2%) compared to 2016.

Industry Close-up: A Look at Purchase Transactions

Agency and brokerage transactions are classified into three major categories: platform, stand-alone and roll-in.

Platform

A platform agency is typically a larger agency that has a well-established territory, brand recognition, seasoned professionals and scalable infrastructure, among other attributes. The buyer of a platform agency is typically looking to establish a presence in a specific region or niche.

Stand-alone

A stand-alone entity may be based on size or geographic location. The firm is large enough to maintain its physical presence but likely reports into a larger platform within the given region.

Whereas multiples for these firms dropped in 2016, we saw in 2017 an increase back up to levels consistent with those of 2015. Both the average base purchase price and realistic purchase price increased 3% over the prior year to 7.93 times EBITDA and 8.79 times EBITDA, respectively.

Roll-in

A roll-in transaction typically involves the sale of a small, privately held agency or book of business, which gets physically rolled into the buyer’s existing operations, either at closing or within a reasonably short period of time.

In 2016, we saw a shift in focus for many buyers who acquired smaller roll-in firms with one assumption: that buyers were looking to complement their network of platforms. Another assumption made was that, due to the high valuations that have continued to increase over the last five years, buyers were looking to blend the average multiple paid across their acquisitions. We believe this trend continued through 2017. The average base purchase price increased 9% in 2017 to 7.20 times EBITDA, and the realistic purchase price increased 6% to 7.81 times EBITDA.

While purchase prices remained relatively flat in 2016, we saw a renewed increase in valuations in 2017, climbing to an all-time high despite rising interest rates and an uncertain tax environment. If early 2018 transactions are any indication, we believe the valuation environment will continue to blaze despite the continued economic uncertainty.

See More: Brokerage M&A Independent Agency Private Equity