The Last Word: Beware the Beckoning Wolves

Mergers and acquisitions of independent insurance agencies continue at a rapid pace. Can anyone truly rationalize today's valuations by private investors, roll-up firms or Wall Street money?

But most buyers' money is like a wolf in wolf's clothing. See it for what it is. Many buyers are simply out for a quick buck and are not interested in the long-term viability of an industry.
Here are three reasons why I see agency owners with seller's remorse:
Culture. The deals sound good upfront, but six to nine months into a merger I often hear former agency owners say: "Why did we do this? We're working harder than ever, our customers aren't our friends anymore, our culture changed, and all our good people left. And instead of serving the client, now we're serving Wall Street or some venture capital firm--and all they care about is return on investment."
Successful owners who agree to sell their firms often don't realize all the value they've built up. These firms have synergy with clients--many of whom are friends because their cultures match up nicely. They have a strong value system that comes from the heart of the ownership. They respond to customers quickly. They can take on new initiatives without the corporate bureaucracy in larger firms.
Management pressure. If investment capital is brought in to grow the agency, fine. Today's investors offer attractive benefits--primarily investment capital that a family business can use to retire, reinvest or restructure. But if it's all about getting a multiple for Wall Street a few years down the line, diluting the firm's intangible asset value, the local franchise can be ruined. Performance here often means that with anything less than a 15 percent internal rate of return, the management team will be pounded.
Local roots. Following mergers, the power of many voices in our industry get pared down to a few. Power gets centralized, often outside the operational locale. Independent agencies give back to their communities--they're behind all the soccer teams and local United Way programs. That local money gets whacked when the investment banker comes into town. They use the money from the local firm to pay Wall Street, not to help the community that built the organization.
So, if agency owners with their top-performing, independent brokerage firms don't sell to Wall Street or roll-up firms, what do they do? After all, the business imperatives are still obvious: growth, expansion, new product lines or industries, and a smart perpetuation plan.
There is another solution. Prospective, high-quality sellers can join forces with other prospective, high-quality sellers with similar long-term goals. Take two brokerage firms that believe growth comes through strong management teams and a true sales and service culture. The benefits: continued growth prospects, economies of scale, greater resources--all without losing the independence and customer care that has served both firms so well.
Because the brokers' independent advice remains intact, the firms continue to offer this asset to clients. When independent brokers hit the streets, they're helping clients because they believe a "client-first" mentality is key to their own success as well. I know dozens of the best--how they think, what they do, and how they structure their business. They're able to attract talent--including many quality producers from larger, publicly traded brokerages who prefer the entrepreneurial atmosphere.
Owners of high-performing, privately held firms are taking a different path to wealth and happiness. With a strong focus on business units such as employee benefits, these principals methodically build cultures that drive value, independence, customer and employee happiness, and ownership wealth.

Jim Hackbarth is president and CEO of Assurex Global, comprised of 20,000 professionals worldwide in the world's largest privately held brokerage group, with annual premiums exceeding $28 billion.