With independent agencies struggling to survive in this anemic economy, many are looking to join with a bigger operation to bolster their leverage with carriers, gain access to new markets and achieve economies of scale. But even though the credit crunch is not necessarily dampening buyer appetites, pulling off a deal is far from a slam dunk.
I recently moderated a panel of some of the biggest buyers in the business, presented by Hales & Company and sponsored by the folks over at FC&S Bulletins–a National Underwriter Company subsidiary. They offered keen insights into the hurdles agencies must clear to attract a partner and earn top dollar on a sale in this capital-starved market.
For one, it's hard to value an agency these days. The economic contraction means that even achieving a 100 percent renewal rate produces lower revenue for agents, since so many clients are cutting back operations and laying off staff that insurable risks are down considerably.
I also noted that any agency with a substantial book of group benefit business is similarly hard to price, since health care reform might cut premiums and profitability, or pull the rug out from under them if a government plan is part of the package.
Buyers on the panel–including representatives from the prolific Brown & Brown (which buys almost an agency per week), Hub International, Alliant, Ascension, Wells Fargo and Digital Insurance (a benefits broker buying small-group books)–estimated that on average, they closed about one out of five deals they seriously explored. That means about 80 percent of sellers come up empty.
One sure deal-breaker appears to be having too much invested in any one client. One buyer reported coming across an agency for sale drawing 25 percent of its revenue from a single account. Talk about putting all your eggs in one basket!
The buyers also want to make sure the seller's top producers are on board, as defections could seriously undermine the agency's value.
One of the buyers goes so far as to survey key clients via a third party to check on satisfaction with, and loyalty to the seller–although a fellow panelist was skeptical about this tactic, warning that presale chatter could scare away clients.
The buyers were especially enthusiastic about working with a seller who wants to stay on board and make incentive compensation part of the deal, based on their future production, rather than someone just seeking an exit strategy.
Money seems to be no object for these buyers, despite the credit crunch. Brown & Brown taps cash reserves for deals, while others have private equity at their disposal.
One potential buyer conspicuous by their absence was the Marsh & McLennan Agency, launched last October by mega-broker Marsh as a separate entity to serve the middle-market. Ambitious plans were announced to build a new, national network of independent agencies via acquisitions, but here we are more than six months later, and I haven't heard of a single purchase to date.
If M&M eventually gobbles up agencies like Pac-Man, that should hike sale prices–the way banks did with a buying binge to diversify their revenue stream. But for the moment, it's been all talk, no action.
Although the panelists agreed that fewer deals are getting done in this economy, they reported sales and mergers are being executed with regularity. All it takes is finding the right dancing partner–which was music to the ears of sellers.
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