Small Brokerage Firms Seen As Big Buy Targets

ATLANTA–Insurance brokerages with big growth-through-acquisition aims will have to grab up groups of smaller firms because there are few larger companies left to target, a consulting firm advised at a meeting here.

Kevin Stipe, a senior vice president and principal with Atlanta-based Reagan Consulting, also noted that pressure from investors to grow businesses, continued weak organic growth from the soft market and the availability of private investment money are fueling acquisition desires.

“Today is the most competitive, exciting and confusing time for this industry in my 16-year experience,” said Mr. Stipe, speaking Monday at a conference on mergers, acquisitions and internal perpetuation sponsored by his firm.

Investors are looking for yearly growth trends at around 15 percent, said Mr. Stipe, but brokers' performance has hovered around 6 percent on average.

To make up this difference, he said, firms have to look to acquisitions to grow. However, of the total firms available, only 11 percent are in the $10 million-plus revenue range.

Brokers need to look at smaller firms for growth, he said, concluding that means 80 percent of the market is in the $500,000-to-$10 million range. Of those brokers, acquirers will need to concentrate on the more than half of firms in the $1.25-to-$10 million range of brokers.

When it comes to pricing these acquisitions, he continued, it would appear the payment for agencies is going through the roof, reaching 10.5 times multiples of revenues.

Mr. Stipe pointed out, however, that for the private and public entity brokers who are paying that much, a lot of the multiple comes in the form of earnout (a cash bonus paid to the principals based on the book's profitability) over a period of years. Typically, the guaranteed cost for an agency averages in the range of 6.5-to-7.5 multiples, with the balance coming from earn out.

“The open-ended earnout is acting as a pressure valve,” said Mr. Stipe on the escalation of prices. “If you can perform, then the value of the agency will be higher.”

In his opening remarks during the conference, Bobby Reagan, president of Reagan Consulting, said the future success of many insurance brokerage firms centers around creating something distinctive, setting them apart from their competitors.

He said there are many companies with problems, comparing those firms with difficulties to “a rudderless ship taking on water without a shared vision of the future for the organization.”

The successful firm, he added, creates opportunity for others with people who are focused.

“We see great potential for the future of this industry,” said Mr. Reagan.