Brokerage Ops the April 2023 issue

For Potential Sellers, What Matters Most Is Growth

With the cost of capital increasing, buyers are getting more selective.
By Phil Trem Posted on April 2, 2023

The conversations in the insurance brokerage space were more about what impact the rising federal funds rate might have on mergers and acquisitions activity due to the higher cost of capital. But in the end, 2022 delivered the second most transactions on record, and well capitalized buyers continued their pursuit for quality targets.

In 2023, the talk has shifted toward “recession or soft landing” as inflation continues and the Fed keeps pace with interest rate hikes. There is no shortage of opinions for how the 2023 U.S. economy will shake out. But for the insurance brokerage M&A sector, the higher cost and availability of debt capital is a gnawing concern.

Of course, this is one firm’s position and not necessarily the sentiment of the industry as a whole. But the key to this statement is the reference to “higher-performing businesses” and “the type of assets we would typically be most interested and excited about.” Performance is king. In this environment, it doesn’t matter how large or small you are. If you aren’t significantly growing (organically), you aren’t going to attract the interest of potential partners.

For acquirers, “quality” and “significant organic growth” will be the key characteristics evaluated when deals get valued.
For Potential Sellers, What Matters Most Is Growth

It’s never too late to focus on organic growth. But for many firms, this may be the year to significantly ramp up organic growth strategy. Being average isn’t going to be good enough, as buyers are taking a more conservative approach in their M&A strategy and looking for those quality firms that can clearly add value and help them grow.

Acquirers are looking for companies that show greater growth potential than themselves. If the average buyer is growing at 8%-10%, why would they be interested in a firm that grows less than that?

M&A Market Update

As of Feb. 28, 2023, there have been 48 announced M&A transactions in the United States. Activity through February is similar to the start of 2022, which saw 51 transactions announced through this time last year.

Private-capital backed buyers have accounted for 31 of the 48 transactions (64.6%) through February, consistent with the trend for the last five years. Total deals by these buyers have increased at a compound annual growth rate of 26.9% since 2018. Announced acquisitions by independent agencies have continued to decline since 2021. On average, 23.1% of total deals were done by this group from 2018 to 2021, compared to 12.6% in 2022 and 12.5% to start 2023. High valuations and availability of capital could be two of the main drivers for this decline in deal activity.

Strong deal activity from the marketplace’s most active acquirers has remained constant to begin 2023. Ten buyers have accounted for 58.3% of all announced transactions observed, while the top three (BroadStreet Partners, Arthur J. Gallagher & Co., and Hub International) account for 33.3%
of the 48 total transactions.

2023 M&A Outlook

2023 has gotten off to a similar M&A start to the previous two years—a slow, methodical and deliberate pace. Although some buyers project they may slow down their acquisition strategy, there are still plenty of well capitalized buyers who are active in the M&A market. The difference will be how targets are evaluated and compared to each other. For acquirers, “quality” and “significant organic growth” will be the key characteristics evaluated when deals get valued.

We remain cautiously optimistic but believe it’s going to be another strong M&A year, with plenty of demand. The question you need to ask is how you can become the higher-performing growth firm that shines brighter than the competition.

Phil Trem President of Financial Advisory, MarshBerry Read More

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