From 2006 through early 2008, the mergers and acquisitionsmarket for agents and brokers was red hot. Buyers–including publicbrokers, banks and private equity groups–were competingaggressively to get deals done. As they did so, both dealvaluations and deal volumes rose above historical levels.

But by late 2008, the climate had changed. The stock market wasin rapid decline, the banking industry was in crisis, and theglobal economy was in recession.

A combination of economic andpolitical uncertainty drove many of the previously active buyersout of the market. Some indicated they would be “more deliberate”in 2009, code for “unless we see something really compelling, weplan to wait out the storm.”

As a result, deal activity got off to a sluggish start in 2009.The first quarter produced only 55 deals–a drop of more thanone-third from the 83 deals in the first quarter of 2008. In thesecond quarter, deal activity dropped even further to only 43announced transactions. And by the third quarter, activity hadfallen to only 36 deals–the lowest quarterly total in more thanfive years.

By the fourth quarter of 2009, however, signs of life werereturning to the M&A market. Stock valuations for many of thepublic buyers were recovering. Several of the traditionalbuyers–including Arthur J. Gallagher, Hub and USI–were raisingacquisition capital, while Marsh & McLennan Agency was planningan aggressive push into the middle market.

Deal activity reversed course in the fourth quarter, reachingits highest level for the year. And the market seemed poised toreturn to historically normal deal volume levels, if not to thesupercharged levels of 2006-2008.

But with more than half of 2010 already in the books, theexpected recovery has failed to materialize. In fact, deal activityhas dropped in both of the first two quarters, and actually trailsactivity through mid-2009.

So, what happened to the M&A recovery? In short, it has beendampened by a lack of sellers. As buyers have returned to themarket this year, they have found agents often reluctant to engagein serious discussions about selling.

Some agents are conflicted and feel pulled in differentdirections. On the one hand is the issue of ownership perpetuation,which continues to loom large. On the other hand, however, is theperception that buyers are offering substantially lower multiplesthan a few years ago. Does selling now mean selling at the bottomof the market?

For those agents wrestling with uncertainty about the currentM&A market, consider the following:

o Deal multiples are stronger than you maythink. Deal valuations are often expressed as a multipleof the seller's pro forma EBITDA (earnings before interest, taxes,depreciation and amortization). Despite the perception that EBITDAmultiples in the current market are down substantially, they areactually down only slightly. In general, 2009 multiples wereapproximately 10 percent below recent highs and have reboundedslightly in 2010.

The confusion comes from the fact that some agencies have lostvalue over the last two years. The combination of a continued softmarket and a struggling economy has, for some agents, resulted innegative organic growth and a compressed margin. The resultingdecline in EBITDA has produced a decline in value.

For example, an agency that experienced a drop in EBITDA from $1million to $800,000 also experienced a 20 percent loss in value,assuming deal multiples remained the same. Conversely, however,agencies that have maintained steady earnings have also generallymaintained value.

o Waiting for improved performance may hurt more than ithelps. If the real culprit behind reduced deal valuationsis reduced earnings (and not reduced multiples), waiting forimproved performance may hurt more than it helps.

In time, the economy will improve and rates will stabilize. Asthey do, agency performance will improve and values will get alift. But it's far from certain either will occur in the near term.In fact, performance may get worse before it gets better.

Current indications are that earnings for many agents andbrokers will be down again in 2010. If so, values will take anotherhit.

The agency owner with a long time horizon can afford to wait forconditions to improve. But for the owner intending to transitionownership within the next two-to-three years, waiting could proveto be expensive.

o Higher taxes will reduce net proceeds.Pending changes to tax law pose a second threat to a strategy ofwaiting. The long-term capital gains tax rate is poised to jumpfrom 15 percent to 20 percent in 2011. Therefore, simplymaintaining value through 2010 won't be enough. Instead it will benecessary to grow value for 2011 after-tax proceeds to equal 2010after-tax proceeds.

Although the window is rapidly closing on the opportunity tocomplete a deal under the current tax structure, it will remainopen until the end of this year.

The decision of when to sell is a complicated one, made evenmore uncertain by external factors such as a grinding soft market,a weak economy and changing tax policy. Ultimately, however, it isa highly personal decision that requires a clear and sober view ofthe market.

Many agents who would otherwise be engaged in discussions withbuyers have been sidelined by concerns about the current M&Amarket. Some of these concerns are legitimate, but others are theresult of misperceptions.

For those agents who can afford to have a long-term horizon,waiting may be the best strategy. But for those who intend to sellwithin the next three years, the time for maximizing after-taxproceeds to shareholders may be now.

Jim Campbell is a principal and senior vicepresident of Reagan Consulting Inc., an Atlanta-based managementconsulting firm that developed and produces the “IndependentInsurance Agents and Brokers of America Best Practices Study.” Hemay be reached at 404-233-5545 or at [email protected].