Insurance agency merger and acquisition activity remains red hot and at record levels. Total announced agency acquisitions exceeded 450 in both the last two years, and the 2015-16 total of more than 900 announced deals is easily the highest two-year total on record.

What's the driving force behind this blistering pace of activity? It's no mystery. Private equity investors — minor players in the marketplace a decade ago — accounted for more than half of all announced transactions over the past two years. In fact, nine of the top 10 buyers of agencies over this period are private equity backed. Well-capitalized and willing to price and structure deals aggressively, these private equity investors are fierce competitors with significant advantages over other buyers of insurance agencies, especially private brokers.

Rooting for the underdogs

But despite being the apparent underdogs, privately held brokers continue to be active players in agency M&A, averaging more than 100 announced acquisitions per year since 2014 and on track to exceed that level in 2017. Compared with a decade ago, private brokers have doubled their acquisition activity while both banks and public brokers have seen their activity levels drop sharply.  

So, how are private brokers succeeding in what would appear to be an unfavorable marketplace? How are they getting deals done despite apparent competitive disadvantages in key areas like pricing and access to capital?

In his New York Times best seller David & Goliath, Malcolm Gladwell noted that underdogs win more often than we expect, in part because their competitive disadvantages can force them to discover advantages. As it turns out, privately held brokers have discovered they too have a few competitive advantages in agency M&A, including (1) relationship and (2) culture.

Relationship cultivation

A strong deal valuation is the primary objective for many sellers, but it's not the only one. Selling a business can be both a financial as well as an emotional transaction and agency owners want to sell to someone they trust. So, how can this create an advantage for private brokers? Through patience and relationship cultivation.

Potential sellers may engage in exploratory conversations with buyers, but typically won't move forward until the timing is right for them. This can be a problem for private equity investors eager to put capital to work quickly. But private brokers with a long-term perspective can afford to be patient. Better yet, they can use this time to invest in relationships with the agency owners and potentially seal out the competition when the time is right to sell.

(Photo: Shutterstock)

Culture matters

Culture can be another advantage for private brokers. Why does culture matter to a seller? First, sellers typically remain employed after closing, at least through the term of the earn-out and often much longer.  Second, most sellers care about the effect the transaction will have on their employees and customers. So, sellers care about the post-closing culture and want to know the answers to questions such as the following:

  • How much operating autonomy will we have after closing?
  • Will all our employees be retained and will their compensation arrangements change?
  • Will we continue to use our brand?

Change is inevitable when an agency is sold, but the extent of this change can vary widely. Sellers generally want to execute a smooth transition, minimize post-closing disruption and retain as much of their culture and autonomy as possible. Private brokers, often more sensitive to this objective and more willing to address it, can gain an advantage. And this advantage can help offset a potential shortfall in the deal valuation or structure.

How long agency M&A remains at record levels is anyone's guess. However, we're unlikely to see a material change as long as private equity demand remains strong. But that doesn't mean private brokers are out of luck.

Despite being challenged to compete strictly on price, some private brokers are succeeding in a competitive marketplace. They're doing so by being intentional, with a clear understanding of what they're looking for in an acquisition partner and with a disciplined process for sourcing opportunities. They're also approaching the marketplace with a keen awareness of their challenges as buyers, as well as their competitive advantages. And most importantly, they're not afraid to get in the M&A arena and compete.

Jim Campbell (jim@reaganconsulting.com) is a partner with Atlanta-based Reagan Consulting, a management consulting firm providing strategic consulting, valuation and merger-and-acquisition services to the independent insurance distribution system. The firm's services include: appraisals of fair market value, mergers and acquisitions advisory, ownership perpetuation planning, strategic planning facilitation, key employee compensation and equity plan design, and agency performance benchmarking.

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