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How the Super-Brokers of Tomorrow are Being Built Today

Larger brokers are getting bigger at an increasingly faster pace, and the number of independent firms is shrinking. Driving this consolidation is the fragmented nature of our business and the benefits to scale.
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how the super-brokers of tomorrow are being built today

In 2021, there were over 900 announced transactions among agents and brokersthe most active year on record and a 25% increase over 2020, the previous most-active year.

In both 2020 and 2021, many sellers explored a sale because of potential capital gains tax increases, specifically those proposed in President Joe Biden's tax plan. Although these rate hikes have yet to materialize, sellers continue down the same path, encouraged by strong valuations and the abundance of well-capitalized suitors.

However, focusing on the specter of tax increases misses the broader point. Sure, the threat of capital gains hikes added to deal volume in 2021, but almost in the same way that whipped cream adds to the height of an ice cream sundae. The whipped cream gets a lot of attention because it is on top and makes the sundae look bigger, whereas the real volume and substance of the dessert is underneath. The same is true of deal activity in 2021. Proposed tax increases get a lot of attention and make the deal totals higher, but the bulk of the activity was driven by something else: the powerful push for consolidation in insurance distribution.

The consolidation of the brokerage industry is happening now. Larger brokers are getting bigger at an increasingly faster pace, and the number of independent firms is shrinking. Driving this consolidation is the fragmented nature of our business and the benefits to scale.How the Super-Brokers of Tomorrow are Being Built Today

With over 30,000 independent agencies in the United States, the market is filled with smaller players who lack the purchasing power, market reach or resources of larger brokers. Those larger brokers can acquire smaller firms and their client relationships, immediately increasing revenue and profit by running them through their operating model and carrier contracts—a powerful consolidation incentive.

The fuel for consolidation activity is capital provided by the financial markets. Bringing firms together requires capital—and larger firms have found capital more available and less expensive than ever before. Public brokers have been rewarded by investors with increasing valuation multiples. The three newest public offerings in our industry—Goosehead, Baldwin and Ryan Specialty—have been greeted by the markets with plentiful demand and staggering valuations.

There are approximately more than 30 private-equity backed acquirers and dozens more private equity investors ready and willing to invest. Lenders have also poured capital into insurance distribution, providing leverage for private equity-based deals and lending directly to brokers. Capital, whether public or private, whether debt or equity, is rapidly and aggressively being deployed. 

While there will not be quite as many acquisitions in 2022 as 2021—the tax proposals certainly pulled forward some deal activity—make no mistake: this consolidation wave will continue in 2022. At this point, there is nothing to stop it. An ample supply of acquisition targets still exists and the fuel for these deals remains abundant.

We're in the middle of a multi-year land grab. Large brokers are racing to get bigger to cement their relevance and reach in the industry's next chapter. The super-brokers of tomorrow are being built today.

Brian Deitz is a partner at Reagan Consulting.

This article originally appeared in the March issue of Independent Agent magazine.

16406
Monday, March 14, 2022
Perpetuation & Valuation