Brokerage Ops the March 2019 issue

Money to Burn

Reinvest in your firm while the economy is hot.
By Phil Trem Posted on March 1, 2019

By financing the transaction, his fixed monthly payments would be far less than his historical electric bills, and in some way, he is probably helping save the planet.

As he was finalizing the paperwork for this investment, the young 20-something salesperson, who is making a living by hustling door to door selling solar panels, abruptly asked my friend, “So, what are you going to do with all the money you are saving?” A pretty bold and startling question. It seems a bit intrusive but should actually make you pause and think.

In January, the U.S. Treasury issued final regulations clarifying that, other than income from investment or financial planning, insurance agencies do qualify for the full 20% deduction for their 2018 taxes and for years going forward until 2025 under President Trump’s new tax law. This allows owners and shareholders of insurance agencies and brokerages to take up to a 20% tax deduction on qualified business income, no matter their taxable income levels.

Congratulations to each of you that benefit from this ruling. While I am not a tax expert, it sounds like your tax payments will go down. But what are you going to do with all the money you are saving?

Consider reinvesting in your business. Organic growth rates continue to be strong. In most cases, however, it is not because your firm is writing more new business than it has historically. It is primarily backed by a growing economy which results in exposure and employment growth. Some of our best clients have found the ideal time to reinvest in their business is when they don’t have to.

This newly found tax savings can help you position your firm to grow 15% and double in the next five years…

Now may be the best time to bring on new production staff or a sales infrastructure to support the production staff. It is time to free up your leadership that currently has a secondary responsibility for leading your sales team. This setup, which is quite common in the industry, tends to be counterproductive for the leader and the sales team.

Consider hiring new leadership positions in human resources, training and development, data analytics, or customer experience. Focus on roles that you know are vital to your long-term growth and sustainability but that you have rationalized as something you are not quite big enough for—these hires that have long been a good idea but never an expenditure you could quite justify.

This newly found tax savings can help you position your firm to grow 15% and double in the next five years, or you can distribute the savings to shareholders and hope your historical investments can help you remain competitive in an ever-changing marketplace.

Many of you are wrestling with whether you should stay the course or sell in what appears to be the most aggressive merger and acquisition market our industry has ever seen. With more deals completed in 2018 than in any previous year and valuations at levels never seen before, it is easy to get swept up in all the excitement. There was a whirlwind of activity in 2018 within the top 100 brokerages, and the momentum in 2019 is not slowing down. A new national brokerage was formed in Patriot Growth Insurance Services (Patriot) (see market update below for more detail), Alliant Insurance Services just took on a Canadian pension investment manager on as a capital partner, AssuredPartners is rumored to be taking on a new capital partner, and there are more unverified whisperings of at least five other large brokerages that are currently or will soon be in the market for either a new sponsor or a sale to another strategic buyer.

Where does this leave you? In this industry, size does matter. It gives you access to more resources to provide your clients with the best service possible, and the scale gives you some influence with vendors, service providers and trading partners for better terms and conditions. If you are going to stay the course, you have to invest to compete. Your peers and competitors are growing at a rapid pace, and you need to keep up. 

If you are going to stay the course, you have to invest to compete. Your peers and competitors are growing at a rapid pace, and you need to keep up.

Many of you will choose to sell this year. And for that I congratulate you on monetizing an asset you likely built over many years. Just make sure it’s a conscious decision and not a knee-jerk reaction. If you end up selling, have a plan and privately be able to answer the looming question: What are you going to do with all that money?

Market Update

M&A activity within the brokerage space did not lose pace in 2018 and appears to be continuing full steam ahead in 2019. Even after a record-setting year, with the announcement of 580 transactions in 2018, January of 2019 brought another 63 announced transactions. This is a 40% increase in transactions compared to January 2018, which is likely to increase further as retroactive announcements trickle in throughout the year. If this is a foreshadowing of the year to come, it appears the flurry of deals is bound to continue.

The leading acquirer in January 2019 was Patriot, which announced 18 transactions on Jan. 1, 2019. AssuredPartners and Arthur J. Gallagher & Co. are tied for the second most active buyers, each announcing four deals.

Patriot made a big splash entering the brokerage space with the acquisition of 17 independent agencies as well as TRUE Network Advisors. Patriot received financial backing from Summit Partners and is led by CEO Matt Gardner. Headquartered in Ft. Washington, Pennsylvania, Patriot spans coast to coast with 21 offices across seven states. This is the second national brokerage to be formed in the last two years in which multiple agencies rolled a portion of their equity into a newly formed firm to leverage the scale of their collective offering. Alera Group was formed at the end of 2016 in a similar way. (MarshBerry was the investment banker for the individual firms forming both Patriot and Alera Group.)

Phil Trem President of Financial Advisory, MarshBerry Read More

More in Brokerage Ops

Navigating Today's M&A Waters
Brokerage Ops Navigating Today's M&A Waters
Q&A with Alex Panlilio, Founder and CEO, Vantage Insurance Partners
Brokerage Ops Internal Perpetuation Under Pressure
Most insurance agencies sell themselves internally to employees, but these sales...
After You Buy, Integrate
Brokerage Ops After You Buy, Integrate
Some acquirers have integration down to a science, increasing speed of the proce...
Well-Oiled Integration Machines
Brokerage Ops Well-Oiled Integration Machines
Integration Playbooks from Long-Time Acquirers
One Meeting People Want More Of
Brokerage Ops One Meeting People Want More Of
One-on-ones are the underused tool for improving relationshi...
Your Résumé Is Not Your Life
Brokerage Ops Your Résumé Is Not Your Life
Employers must look beyond résumés and job titles and cons...