M&A Master Class

It has changed our approach a bit. Being largely a family-owned company, we had an ESOP [employee stock ownership plan] that we used to incent key employees. We’ve historically valued the company consistent with the way an ESOP is valued, which involves some restrictions that bring the value down. We always used that ESOP value for our valuation, and then we could see that it was less than the fair market value in the marketplace. We didn’t want to sell the business, but it became more difficult for us to justify increasing the prices at which we buy agencies if our internal valuation was lower. So, to get a better sense for what our value was in the marketplace, the Capital Z transaction was quite helpful in establishing that.

Knowing what the value of our company is in terms of a multiple of EBITDA, that helped us justify being more competitive on larger deals from a price standpoint. We’ve always been competitive in other non-financial areas, but there’s only so far that non-financial elements go in winning the trust of future partners. And so that’s one way it’s helped us.

[We have] a fairly unique operating model in that it involves shared ownership of the agencies. Now, we’re not unique in a shared ownership model. There are many that have that. BroadStreet [Partners] is probably the most prominent in having shared ownership at the local level.

Our operating model is fairly simple. Each agency is owned about 60% to 70% by Leavitt Group Enterprises, which is the parent company. We have about 275 locations and 90 separate agency corporations where we are the majority partner in each of those corporations. And then one or more co-owners are the owners of the minority interests. And those who hold the minority interests are charged with operating it day to day.

We deliver to them resources to help them operate in ways that they couldn’t otherwise do. We have shared services. We have a common IT platform, common HR platform, common legal platform. And all of these shared services are delivered through an entity called the Leavitt Group Agency Association, which is essentially a cooperative, where we gain the scale and the buying power that we can deliver at the local level. That gives them the capacity to be much like a national broker, but to have local autonomy and local control.

Integration is kind of the word of the year and was last year, too. We began integrating really in the ’70s. We understood the principle of aligning interests and finding ways in which this group that had aligned interests could determine what it is that they’re going to invest in and gain the scale that comes through that collaboration and that alignment of interest. We’ve been at it a long time. It’s hard work to be integrated.

We do, as I said, 25 or so deals a year, and you just create from the start an expectation with the new affiliate that they will be integrated from the beginning, seeking to mitigate as much disruption as possible to them in the short run.

For us, a cultural and relationship fit is the most important first step. I mean, pro formas are great. You know, how this might look from a financial standpoint is of course necessary, because you don’t want to go into a deal that’s going to fail financially. But equally as important, and arguably in some cases more important, is, are you going to fit with that potential partner culturally and from a relationship standpoint? Because we really do vest almost complete autonomy on the day-to-day operation to those local people. And so first and foremost, do they have a desire to remain in their agency for a period of time following the transaction?

Generally speaking, the ideal agency to join our organization is one where there is one or more owners that are maybe five to seven years prior to their retirement, don’t necessarily want to take the biggest check they can get, but they want to be assured that the culture and the heritage and the history of their agency is retained. But they also want to retain the opportunity for younger people to buy in. We often have seen agency owners who sell 100% of their agency, and they’ve got younger people who are up and coming, many of whom have actually helped them build the enterprise value and they get shut out. Many buyers of agencies like this are very smart to tie those younger people in, but the younger people often don’t have the same opportunity to own equity in the local operation.

So someone who doesn’t want to necessarily sell out right away, has some runway to take the tools that we will bring them and build the agency, post-transaction, for five to seven years. And those that have identified one or more potential successor owners who we might work with to help them with their second liquidity event, when they sell their remaining interest to that younger person. We facilitate and, in many cases, provide financing for that younger person to buy out the incumbent owner when it’s their time to transition. On one hand, we win deals all the time without paying the highest multiple to the table. On the other, we also recognize we have to be competitive.

We also have been very effective in showing selling agency owners that the value that they retain by only selling, call it 60% or 70% of their agency, can grow in a way that, if you look at the net present value of the first liquidity event at the time of the initial transaction and then in the subsequent liquidity event at the time of their sale to their successors, they very often do better than they would have had they sold 100% five years previous.

To be a great fit for our model, we need a somewhat niche seller, as you can see. They need to be willing to not sell 100%. They need to be enthused about staying in the deal and building the deal. We view that as a positive because we think that the subsequent liquidity event will, in the net with the original liquidity deal, add up to receiving more for the business than they would have otherwise if they sold 100%. But they also recognize that one of the sacrifices they make is to create terms for the younger person to buy in that are palatable. I mean, it’s not a layup for these younger people when they purchase shares from the retiring owner, but it has to be at least palatable.

As I said, we’ve been integrating since ’78, but there were periods in our history when we didn’t integrate from a technology standpoint into a single system. It’s a more fun story to say to a prospective affiliate, “You can come join us, and we’ve got all these really good things, and you don’t have to migrate systems.” We could see about 15 years ago that was a fool’s errand. It wasn’t going to end well. And not only was it adding operational cost to us, we came to realize in ways that were pretty profound then, but are much more profound now, the value of having a unified system and a data stack that is not only all in one database, but that is uniform in the way it is structured in terms of policy data, customer data, industry classifications. That’s the gold mine, frankly.

And that gold mine doesn’t come unless you are fully integrated. Many of my friends who have been really successful in building billion-dollar agencies in less than a decade are coming to understand the importance of integration, and their investors are demanding it. If you’re going to grow your organization, you need to grow more than top line, you need to grow EBITDA, too. And that EBITDA growth will come through the efficiencies that will come through integration. The challenge with that is it requires capital and that capital won’t return EBITDA immediately. It takes some time. So 15 years ago we made the determination that we would go from servicing five systems to one. You might ask if that was a difficult decision to implement. Indeed, it was.

First of all, in our model it’s hard because we very rarely dictate from the top things that are going to happen. And you know, the things that we dictate are usually things that are associated with the law. If it’s illegal, we’re not going to do it and we will dictate that to our affiliates. But for the most part we work through collaboration and the pursuit of consensus. So when we did our system consolidation, we got a bunch of our system users together and said, “Look, let’s all agree we need to do this.” And everybody agreed we needed to do it. They could see it. The decision came down to which system was the best to unify around. It took us two years to determine the system.

We knew, frankly, from the start the system that we wanted. We could have short-changed that and said, “OK, this is all fine and good, but this is where we’re headed.” We needed to be able to win the minds and hearts of those who are going to be using the system in ways that they didn’t feel pushed. Because as human beings, if it’s our idea, we’re all over it. If it’s someone else’s idea, it’s really challenging. So it took us two years to align on what we could see early on was the best outcome. So again, why is it so hard? In our model it’s hard because we don’t use compulsion that much.

Some would argue, and I would agree, that it’s a really inefficient way to run a business to look around and ask for consensus on all things. And we don’t do that in all things. It is somewhat inefficient, but we believe that it preserves this alignment of interests, preserves the trust that we have with one another, and makes our model so special that we give so much autonomy to the local folks.

If you look at what’s happened the last two years, I know there are firms that are spending hundreds of millions of dollars on these efforts to integrate, and they’re wise to do it. Without that, much of the real gold I referred to earlier is really lost. And the gold isn’t necessarily just financial, ultimately it gets to financial, but it’s really cultural. When you have 275 offices across the United States, it’s a real advantage to have your office in Boise, Idaho, feel a real kinship to the agency you have in Wheeling, West Virginia, even though they share no clients.

We work really hard to create this sense of belonging and this sense of connectivity, and it’s manifesting in really positive ways, not the least of which is we’re doing lots of really good work in cross-agency team-ups, where subject matter experts from agency A help subject matter experts in agency B. It’s a real manifestation of the financial part of a non-financial effort.

We’re at an interesting inflection point. We’re seeing that inflection point manifest in some of the bigger deals that have happened. Most notably, the large acquirers that have been kind of subsumed by the top five. I think it’s been well documented why that is happening and I’ll just note it. It’s getting harder and harder for these agencies that haven’t really integrated to be able to demand valuation multiples that go beyond that which they have gotten in the past at a refinancing. So they’re facing the obligation to refinance their equity and get their current equity partners out. And they can’t find a substitute that’s willing to pay a comparable multiple because you can only grow at double-digit rates for so long through inorganic growth.

The only firms that have shown a willingness to take on a massive integration project have been the larger public brokers. You’re going to see more and more of these larger kind of nascent billion-dollar firms face the same challenge when it comes to integration.

Right? How can you be nascent and be a billion-dollar firm? But we’ve seen it. They’re not going to have much choice but to either go public or to get consolidated if they don’t choose the integration route. And there’s only so many of these firms, frankly. Gallagher and Brown & Brown and the others can acquire and integrate at one time, because there is a definite opportunity and transaction cost associated with that integration.

Now, if you go downstream in terms of organization size you also need to look at the fact that multiples are leveling. And if you look at the multiples that the publicly traded brokers are trading at now, most of the publicly traded brokers this week are at 52-week lows in their stock price. That doesn’t fundamentally mean their businesses are worse, it’s just the nature of the marketplace, because I think these are all terrific businesses. But that’s going to put pressure on multiples, and it may put a chilling effect on some that were preparing to sell, and it might put a chilling effect on the market. I don’t know that for sure, but we’ll see. Some would say, “Hasn’t the consolidation nearly happened in total? Because so much has happened.” And the short answer is no, because every year there are new agencies created, and every year these agencies that are created are searching for solutions to help them get bigger. We’ve all been watching this M&A market for a decade and a half now thinking, “OK, now is the time when it gets less crazy.” I think the short answer is [the M&A market] will never get, quote-unquote, traditionally viewed as sane. But it’s a great business, and there’s a reason why capital has flocked to this business.

2026 will be an interesting year for us in terms of our evolution as a company. We’re forming our own MGA, and we’ve been very up front with our key wholesale partners to say, “Look, this isn’t a goal to replace you.” We can see that we have nearly a billion dollars in premium that’s with a whole lot of wholesalers. But we have subject matter experts within our group who can create programs where we have specific underwriting opportunities in areas that are really valuable, not just to our clients and to the carriers, but to us, too. We can see that taking a piece of that value chain is a wise thing for us to do and can be done without being deeply disruptive to the very necessary relationships we have with our wholesalers.

The Hales Report had [Berkley President and CEO] Rob Berkley, who’s a friend and is one of the great leaders along with his dad in our industry, talk about the changing nature of the relationship between carriers and distribution. And that’s been happening for a while, arguably started with carriers going direct. They may say that it started elsewhere, but then you’re seeing more and more historically retail distribution firms forming or buying wholesale outlets. So that’s what we’re doing. We’ve decided not to buy anything. We’re going to build it.

It’ll be unique in that, consistent with the way we do things, our agencies will own it, the parent won’t own it. The agencies will put the capital up, and they’ll place business into the MGA. And we hope it’ll thrive.

We’re also in the process of formalizing our effort in risk advisory that right now is really distributed. We have about 30 FTE across the group that are dedicated to providing risk advisory to clients, but it’s done on kind of an agency-by-agency level. So we’ll organize that in a way that will serve our clients better but will also create opportunities for us to get new revenue sources.

We’re still a little bit on the outside of trying to figure out, like many of my friends in the business are, how we can get into financial services and wealth advisory, in a way that doesn’t necessarily create undue risk exposures because it’s a completely different ball game the way it’s organized, the way it’s regulated. That may not be a ’26 thing, it might be a ’27 thing.

In addition to that, we’re just trying to sell a whole lot more insurance to our clients and acquire new clients. That’s what’s on tap for ’26.

Look, we’re grateful to be in an industry that is honorable. I use the term noble. It is a noble industry. You think about the service that we provide, not just those who have claims and are in many cases at the worst moments in their life, but the enabling power of the insurance industry in terms of forward-looking economics. Anything that’s built and financed requires us in the industry. We are sources of comfort and sources of protection that allow people to venture in ways they may not otherwise do. And I’m proud to be in the industry, proud to be a part of it, and grateful for the role The Council plays in not just convening us together but enabling us and empowering us in ways that are making all the member firms better.