Value Added

The valuation derived during an acquisition is all about metrics. The numbers you typically hear about are EBITDA (earnings before interest, tax, depreciation and amortization) multiples and revenue multiples or total deal value. 

Don’t forget that most exaggerate. There is about as much truth in the multiples your peer down the street tells people he sold for as there is in the size of the fish he caught last weekend.

What is probably less known, but is still very interesting, are the numbers behind the numbers. Do you really know what helps a buyer decide what multiple he is actually going to pay for a seller? Some of it has to do with competition or the scarcity value of the asset. More of it has to do with a number of factors including historic organic growth, profitability, number of producers, quality of client list, account concentration and consistency of contingencies. 

The EBITDA multiple is affected by risk. A buyer is taking a risk, reasoning if it pays you an 8x multiple at the closing of a transaction, it can sustain (and grow) your profitability levels for each of the next eight years. It is effectively paying you with your own money. However, it is giving it to you risk-free and all at once. A seller’s ability to command a higher multiple correlates directly to its ability to lower the risk associated with its business. 

One area often overlooked by sellers is the quality and depth of staff. You are in the insurance business, but you are also in the human capital management business. An agency with depth and redundancy in its staff is looked at more favorably. An agency that has a stable of producers (who actually produce and are not just maintaining a book of business) as opposed to being reliant on the majority owner to drive substantially all new business is also a positive trait. 

Recruiting talent is one of the most difficult challenges throughout the industry. It is not easy to find the next great producer, commercial lines manager, or account executive. Agencies must make recruiting a part of their ongoing strategy. A recruiting strategy does not mean you put an advertisement on your website when one of your employees quits or decides he wants to retire. 

Organizations should consider a multifaceted approach to building their bench. Finding a top tier producer without a non-compete is about as likely as seeing a unicorn. That is not a strategy.  Agencies are not able to throw money at the problem either. Trying to lure producers away from their current employers or fighting restrictive covenants is not an advisable strategy. This is not Major League Baseball. A strategy used by the New York Yankees or Los Angeles Dodgers to buy high-priced top talent just doesn’t work. You have to be more akin to the St. Louis Cardinals or the Washington Nationals. They have well-run front offices positioned to grow talent through their farm teams. They are a selective force in free agency. Consider applying their strategy to your agency.

Are you interviewing three to five people a week in your organization? Are you networking for new hires even if you don’t have an open position? You should be. Good people don’t typically fall into your lap. For the typical insurance agency to be sustainable, recruiting and training efforts must become a much greater focus.

This next generation will not only better position the firm for internal perpetuation, it also creates a better risk profile. Buyers are not really interested in inheriting your transition challenges. The sustainability of your book of business and your ability to grow are much greater if you have a solid team not heavily weighted by individuals within five years of retirement.

It is imperative you take action. Put it in economic terms to help convince yourself and your partners that an aggressive recruiting, onboarding and training curriculum are essential. A robust recruitment program will help you grow today and will probably improve your multiple when it is time to exit.

Market Update

The deals keep streaming. The 26 deals announced in July bring the year-to-date total to 216.  There were significant announcements in early August, which will likely lead to another month of 25+ deals.

AssuredPartners announced its investment partner GTCR will be selling its interest in the firm to APAX Partners. This is the same PE firm that took Hub International private in 2008 and subsequently sold its interest in 2012 to Hellman & Friedman.

AssuredPartners is still leading the pack with 19 transactions for the year. Hub International gets the second spot with 14. Confie Seguros and Arthur J. Gallagher are tied at third with 10 each. AJG also announced it closed its transaction with Boston-based William Gallagher. NFP finishes July in fifth place with eight announcements. NFP’s July activity includes the acquisition of Long Island, New York, specialty brokerage BWD Group, continuing NFP’s commitment to growing its p-c presence across the country. 

Integro announced it will sell to Odyssey Investment Partners. This is the fourth private equity recapitalization of a Top 100 brokerage in three months.

The crazy part of all these transactions is that it is not even painting the whole picture.  BroadStreet Partners, Acrisure, and NFP have not publicly announced all of their transactions.  Collectively the three firms have announced only 15. Yet the three firms have privately reported 48 completed through July. This would increase our 216 total to 249. I am sure there are more unannounced deals from other buyers too, but these three firms give you an idea of what is happening just below the waterline. The Top 100 is undergoing significant consolidation, private equity continues to buy the buyers, and the independent space continues to struggle to be competitive in an ever-changing environment. 

At some point this has to slow down, but for now, put on your seat belt and enjoy the ride.