Increase Your Agency’s Value While M&A Activity Is Hot

By: williamjones
April 3, 2017

In the U.S. and Canada, 449 mergers & acquisitions took place in 2016—slightly less than the record 456 deals in 2015, according to the latest annual report from OPTIS Partners.

Consistent with years prior, property-casualty agencies dominate the M&A list, comprising 54% of all sales. But what makes one agency more valuable than another?

Here are two tactics that make agencies stand out to buyers.

Specialization. “The things that are more interesting to acquiring buyers are those agencies that have a specialty expertise in a particular industry or coverage classification,” explains Richard Kerr, CEO of MarketScout. “If you are a specialist in personal auto—let’s say you’re doing classic cars and that’s 80% of your book—that would be much more interesting than just a general auto book.”

Basically, agencies that help buyers enter a new market are more valuable, Kerr suggests. Still, Dan Menzer, certified M&A adviser at OPTIS Partners, says specialization comes with its fair share of risk.

“It narrows the market for a seller if they’re specialized,” Menzer says. “But at the same time, if you can identify the right buyers that have interest in that particular niche, it can increase the value.”

Higher margins. “To simply make your agency more valuable, you need to increase EBITDA margins”—earnings before interest, tax, depreciation and amortization, Kerr says. “You can have $20 million in premium and make $1 million if you run a good operation. The acquirers are paying a multiple of that EBITDA margin.”

But how to do it? “If somebody plans to sell in five years, they have time to concentrate on improving the financial performance of the business and eliminate any excess baggage,” Menzer suggests. “It’ll improve their margins and EBITDA, which in turn will yield a higher value, assuming consistent EBITDA valuations.”

Plus, Menzer points out that if buyer multiples decrease over the next few years, “hopefully the higher EBITDA will offset any reduction in the valuation multiples.”

Jordan Reabold is IA assistant editor.

To Sell or Not to Sell?

Not sure whether now’s the time to sell? Kerr says holding off may not be a bad idea, considering current potential for economic growth and re-energization of small businesses: “Some agency owners are thinking they may have an opportunity over the next few years to grow their agency quicker and easier than they have in the past.”

Because of low interest rates, however, Menzer says there’s no better time than the present. “Prices are close to all-time highs, and they don’t have a lot of direction to go but one way,” he points out. “It’s very possible that the valuation multiples we’re seeing in transactions today will come off their peaks.” —J.R.