To Sell Or To Fight: That Is The QuestionMarket pressure, the momentum of thecompetition and the recent increase in agency value has compoundedthe age-old question that burdens many agency principals: “Is nowthe time to sell?”

Well, if it is not the time to sell, it is the time to fight.Agents either should make a commitment to divert their time,attention and resources to internal staff reinvestment andperpetuation or to sell their agencies while valuations are at ahigh point.

This article speaks to those independent agencies that are readyto fight for their independence, despite the improving strength ofthe competition and the premium prices currently being paid by theindustry consolidators.

If you, the agent, are committed to independence, you better beready to fight a war. And this war will occur in your ownbackyard.

According to MarshBerry, the number of deals where an agencysold to a third-party buyer, excluding small transactions that werenot publicly reported, increased to 190 during 2002 from 178 during2001. There is no slowdown in sight. MarshBerry predicts that thenumber of deals will increase to at least 210 during 2003.

The public and large independent insurance agency competitionwith dramatic revenue growth, stellar core profitability and strongemployee productivity are taking their future seriously and aregaining momentum.

A choice to stand on the sidelines frozen with inaction willbecome a sword in the heart of the average independent agency aslarger firms continue to acquire, gain market share, buildaccountability-based sales management systems, develop proprietaryprogram specialties and increase their focus on middle marketbusiness.

Buyers continue to pay premium value, but the big numbers areonly being received by those insurance agencies that are of betterthan average quality and are willing to accept a partial earn-outstructure. (An earn-out involves a supplemental payment that is notpart of the original acquisition cost based on futureearnings.)

Agency value, as measured by pro forma EBITDA (pro formaearnings before interest, taxes, depreciation and amortization)increased 5.8 percent during 2002 to a weighted average of 6.97times EBITDA. Agency value as a multiple of revenue increased at aneven greater pace of 15.2 percent, or to a weighted average ofalmost two times revenue, including the value of the acquiredbalance sheet.

For some peak performers in the right market, with ample buyers,with the right metrics and an institutionalized production staff,value has exceeded eight times EBITDA and 2.5 times revenue.

Would your future be threatened if your most competent privatelyheld competitor was lured to sell to a well-capitalized partnerthat is focused on the middle market? Are you prepared for such afight?

Many agency principals have their head in the sand and dispelthe concept that market consolidation will come home to roost. Weoften hear from agency principals that “banks in insurance” is afad. Eventually, they feel, the wind will blow in a differentdirection and the banks will exit the business.

If agents asked their insurance companies, they would hear thatbanks have a desirable middle market focus and are communitycommitted. Banks are well capitalized and have gone from zero to,in some cases, 25 percent of insurance company premium volume, infive short years. Banks are here to stay.

Public brokers are also in an enviable competitive positionrelative to independent agents.

Agency principals often site the fact that public brokers loseas much out the back door as they acquire and cannot providecontinuity in the service area. Whether that is true or not,brokers have superior market access and therefore a vast array ofproducts to sell.

Insurance companies burdened with capacity issues and damagedcombined ratios are looking for the largest amount of premiumvolume per relationship. They are openly taking on a greater volumeof business from public brokers and running off independentinsurance agencies that are not committed to perpetuation, havehigh loss ratios, slow premium growth and sublevel volumecommitments.

Opinions vary, but the numbers do not. The average independentinsurance agency posted revenue growth of 9.5 percent during 2002,which is paltry compared to the rates achieved by public brokers,large bank-owned agencies and large independent insuranceagencies.

Brokers have access to public capital and their stock forcurrency in acquisitions. As a result, they did not feel the needto maintain tangible net worth greater than a 6.2 percent deficitat the end of 2002.

Bank-owned agencies focus on building accountability andcross-selling sales management tracking systems to support aone-stop-shop sales pitch and tend to take a balanced approach togrowth. As a result, larger bank-owned agencies achieved revenuegrowth of 14.2 percent during 2002, which is slightly less thantheir peers, but did so for the sake of driving short-term EBITDAof 28 percent and tangible net worth of over 40 percent ofrevenue.

Large independent insurance agencies, not burdened by publicscrutiny of profit, are reinvesting their profit and tangible networth for growth. As a result, they achieved revenue growthapproaching 19 percent during 2002.

The large independents are reinvesting for long-term survival inareas such as sales management training, mentoring andaccountability, new producers, internal ownership perpetuation, andstaff incentive compensation. They are also investing invalue-added services such as human resource consulting, claimsadministration, risk management and loss control.

The average independent agency is struggling with reinvestmentin value-added services. As a group, they are achieving inadequateproductivity, slower growth, and therefore lower profitability andbalance sheet strength. Perpetuation in the average agency is stuckin a perpetual filibuster mode where promises by agency principalsare made and not kept due to a general unwillingness to broadenemployee ownership. This results in an inability to attract andretain new blood in the production area.

Independent agencies can win the war to remain independent iftheir focus is shifted to driving long-term performance. The silverbullet to performance is attracting, hiring and retainingtalent.

We believe the solution to developing talent is to implement aroadmap for perpetuation. Agents need a plan to attractentrepreneurial self-starters and to ensure their success inproduction and participation in agency ownership. The best planshould teach perpetuation candidates how to manage debt tofacilitate perpetuation and how to attain long-term personal networth.

Many large independent agencies have pursued such a plan andhave become the employer of choice compared to public brokers andbanks that often provide no comparable ownership incentive.

What is your battle plan to become an employer of choice todrive agency performance?

Too many independent insurance agencies perceive perpetuation asa transaction. It is not a transaction. It is a long-term process.It is a process to attract, retain and shape perpetuationcandidates that drive agency value. These candidates must bewilling to amass personal debt to facilitate perpetuation asplanned buyouts occur. This could be accomplished through aPerpetuation Stock Incentive Plan. (See related article, nextpage.)

The time is now for those committed to independence to develop abattle plan for survival. Growth and profitability sufficient forsurvival will only accompany a plan to build the right team, aprocess to help producers become acclimated to perpetuation debtservice, and a mechanism to put talent to the test.

Independent insurance agencies will thrive and continue to be anemployer of career choice for the nations leading producers only ifindependent agencies embrace the concept of helping the bestproducers participate in the risks and returns of private ownershipand to build personal wealth.

John Wepler is Executive Vice President of Marsh, Berry& Company Inc., headquartered in Concord, Ohio, an insurancemanagement consulting firm. He can be reached at [email protected].

Reproduced from National Underwriter Edition, June 9, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.