Where are prices for buyers and sellers of independent agenciesand brokerages heading, and what impact will recent negative trendsin the industry have on an agent's ability to get the most valuewhen putting their firm on the market?

Those were some of the themes dominating the conversation atReagan Consulting's sixth bi-annual Mergers & AcquisitionConference last month in Atlanta.

The conference drew 120 industry executives representing leadinginsurance agency and brokerage operations and financialinstitutions–including buyers, potential sellers and firmscommitted to private ownership. Our forum provided manyopportunities for interaction among the participants, along with 16workshops and seminars on a variety of topics.

The workshops gave us an opportunity to do a lot of listening tothe perspectives of the participants. It also gave us anopportunity to share our insight and experiences from consultingwith many industry leaders and from our significant activity withinthe M&A arena.

One of the most interesting and perhaps important questionsraised was whether the prices paid by acquirers are in facttrending down, as is being reported and suggested by some withinour industry.

We recognize that certain acquirers may be suggesting that thistrend is taking place–or hoping that it takes place. Those that aresuggesting this as a trend are attributing the decline to asoftening property-casualty market and resulting anemic organicgrowth, as well as the threat of a potential loss of contingentincome throughout the industry–part of the fallout from the probesinto industry practices by New York Attorney General EliotSpitzer.

We at Reagan Consulting certainly recognize these issues andrealize they can have an impact on the prices paid byacquirers.

However, in spite of that impact, our experience would suggestthat for the most attractive acquisition candidates, any impactthat these factors are having is being trumped by the effect ofsupply and demand on pricing. Let me offer an example to put thispoint into perspective.

Look at a quality firm from two years ago that had earnings,growth capacity and a balance sheet at a certain level, andconsider the price and terms that the most aggressive buyer wouldhave been willing to pay for them at that point in time.

If you take that same identical firm today–with the samerevenues, earnings, growth capacity and balance sheet–ourexperience would suggest that the firm, in the current marketplace,is likely to get a price and terms that are every bit as attractiveas they would have received several years ago.

All of this is not to suggest that the softening p-c marketplaceor the threats to contingent income should be ignored. These arereal issues that can or could have a real impact on agencyvalues.

What we do see is that the supply of large, quality andwell-positioned insurance agencies or brokerages is decliningthrough attrition. Simultaneously, we also see demand increasingdue to a number of factors. (See accompanying sidebar.)

If you took the targeted commission revenues that each of thecurrently active acquirers within our industry are looking toacquire and add them up, it is a number that is many times largerthan any realistic estimate of the revenues that are there to beacquired.

Therefore, the demand that exists significantly exceeds thesupply. Based on what we see, there is no expectation that thisdemand is going to decrease any time soon.

The impact of supply and demand on pricing is more of a factoron the upper end of the candidate pool. The upper end would includeagents and brokers who are larger, of better quality and morestrategically positioned as respects location, business mix andstrategic value to the acquiring entity.

The impact of supply and demand on pricing will not be assignificant for smaller agencies, agencies in less appealingmarkets, and certainly any agency that brings less strategic valueto the acquirer.

It is interesting to also consider the implications of theinability of the market to meet the collective desires of thoselooking for acquisitions. We see a lot of acquirers looking atacquisition opportunities other than a p-c oriented agency. We seeacquirers looking more for benefits-only shops, wholesalers andmanaging general agencies as well as niche players and specialistoperations.

We also see acquirers being more open to, and focused on, growthstrategies built around hiring producers–particularly those fromother brokerage operations. This is being fueled by a lot of theturmoil existing in the industry, but is also being moderated bythe experience of some who have hired talented people only to findthat the business didn't come with them.

The challenge of sharing thoughts on pricing, structure, etc. isthat we as a firm are actively involved in the market representingboth sellers and buyers, as well as working with many firms thatare committed to remaining privately held.

No matter what the situation or who we're speaking to, ourmessage regarding values, pricing and structure is consistent. Thatmessage consists of the following:

o Quality still matters.

o Value is primarily a function of earnings and the capacity togrow those earnings.

o The quality and stability of your employee base can have amaterial impact on value.

o Your capacity to grow your revenues and earnings canmaterially impact the value that should be paid.

o Strategic alignment with the acquirer can materially enhancethe value that can and should be paid.

o The structure of the transaction and the tax implications tothe acquirer can have a material impact on values.

In addition, we recognize there are a lot of external factorsthat can't be ignored by either buyers or sellers. Two at the topof the list today are the future of contingency income and theenforceability of restrictive covenants. Both of these can have amaterial impact on value.

For our agency and brokerage friends, there are certainly a lotof challenges that you are facing today, and I am certain will facein the future.

In spite of those challenges, there is a lot to be thankfulfor–not the least of which is owning assets that are in limitedsupply, in a marketplace that has significant demand for thoseassets.

That demand has created a lot of value for the equity holderswithin the insurance distribution system. Continuing demand and acontinuing limited supply should ensure that those values remainstrong for many years to come.

Bobby Reagan is the president of Reagan Consulting, anAtlanta-based financial and management consulting firm working withinsurance agents, brokers and financial institutions. He can bereached at [email protected].

Flag: Positive Factors

Head: Why Agency M&As Remain Attractive

Although a softening commercial market and the potential loss ofcontingency fees might lead some to predict that prices for agencyacquisitions could fall, there are a number of countervailingfactors certain to keep agency values rising. All have to do withsupply and demand issues. There is more demand than supplybecause:

o To achieve the desired earnings growth, public brokers need todo acquisitions to offset their anemic organic growth.

o Financial institutions still see acquisitions of insuranceagents and brokers as the most attractive entry source to insurancesales.

o Many of those who have already gotten into the business seeacquisitions as the most attractive way to create meaningfulcritical mass.

o There are a number of aggressive new entrants into the marketthat are looking to assimilate significant revenue streams throughacquisitions.

“The demand that exists significantly exceeds the supply. Basedon what we see, there is no expectation that this demand is goingto decrease any time soon.”

Bobby Reagan