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Why Agency Sellers are Becoming More Selective

As investors seek safe havens for their capital, they are increasingly turning to insurance agencies and brokerages as predictable and consistent vehicles to grow their assets. 
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why agency sellers are becoming more selective

2021 set record highs in insurance agency valuations and deal activity. Between 2017 and 2021, our industry announced around 3,700 transactions. Including unannounced and non-broker transactions, nearly 1,500 deals occurred in 2021 alone.

On average, our industry closes about four deals per day. But will 2022 keep up the pace? And what does that mean for buyers and sellers?

Last month, nearly 70 CEOs from the top 100 U.S. agencies gathered in Atlanta for the Reagan Summit to discuss the future of the insurance brokerage industry. While at the Summit, over 50% of these CEOs and agency leaders predicted that mergers & acquisitions will remain robust, despite inflation, global conflict, rising interest rates and stock market volatility.

Not only have buyers proliferated within the insurance industry, but significant capital is available in both debt and equity. Globally, uncommitted capital has grown nearly 17% annually since 2015, reaching a record $1.81 trillion in January 2022. 

As investors seek safe havens for these funds, they are increasingly turning to insurance agents and brokers as predictable and consistent vehicles to grow and deploy their assets. Given all these factors, leaders expect 2022 deal activity to either remain consistent or exceed 2021 numbers.

Yet, as buyer demand continues to grow, there is a limited supply of quality agencies that generate over $10 million that are selling, which, in turn, affects valuation. At the Summit, 66% of industry leaders predicted that M&A pricing will either increase or remain in line with 2021's record valuations. For context, in 2021 Reagan Consulting saw valuations for high-quality agencies consistently exceed four times revenue.

Not only are valuations predicted to rise, the number of seasoned acquirers—agencies doing more than five deals per year—continues to grow. In 2021, 31 acquirers completed five or more transactions, tripling the number from 2013. These buyers have an investor mandate, capital set aside and M&A teams formed with one goal in mind—to grow via acquisition.

If you are a seller, this is music to your ears as options abound. But at the same time, the choices can be overwhelming, and many buyers are having a hard time differentiating themselves in a crowded marketplace. Sellers are asking more discerning questions, like:

  • How much equity can I take in the transaction, and how is that equity expected to perform?
  • What is my compensation package post-close, and how can you accelerate my compensation?
  • What resources do you offer, and will my agency have to sacrifice its autonomy?
  • How do you plan to enhance the experience for my clients and employees?

Private equity backed brokers have consistently achieved over 25% annual returns on the growth of their stock, which translates to a six-fold return on investment over 10 years. For example, an investment of $3 million in a private equity backed brokers' stock in 2012 is likely worth more than $18 million today. This is why determining the right partner is so critical.

To sustain these eye-popping returns over time, buyers must have strong fundamentals, such as organic growth, leadership, integrated technology systems and a stable capital structure capable of withstanding economic cycles.

The past 10 years might not be indicative of the next 10 years, but joining the right team is critical to safeguarding a seller's rollover equity. There are too many buyers in the marketplace for sellers not to select their ideal and customized buyer. Choosing incorrectly is likely a million-dollar mistake.

Harrison Brooks is a partner at Reagan Consulting.

16588
Saturday, June 18, 2022
Commercial Lines