Industry the November 2017 issue

What’s Your Value: Good or Great?

Even in this robust M&A market, the highest value appears to still be reserved for peak performers.
By Phil Trem Posted on October 27, 2017

Are you good? Or are you great?

We all want to think that our agencies are great and will fetch the highest value in the market. After all, we started the business and grew it, and it’s likely supporting a comfortable lifestyle. So most owners believe they deserve an attractive asking price when they go to market. And, in our opinion, there’s nothing wrong with wanting a high value for the business.

But is that what the business deserves?

Are you doing the work to generate at least 20% new business written as a percent of your prior year’s commissions and fees and growing organically by 15% annually? Our proprietary benchmarking suggests that most firms write around 12% new and grow in the low to mid-single digits. Very few have figured out how to run a sustainable, high-performing business.

Even in the most robust mergers and acquisitions market the insurance industry has ever seen—with multiples at an all-time high—there is a misconception about what price a seller will get. Many believe that, because of high demand, good and below-average firms still deserve the highest market value. But that’s not the case—not in any market.

Are you good, great or just hanging on to a really good lifestyle business?

If you want to take advantage of today’s active M&A market and truly maximize your value, there’s work to be done. Despite the high multiples being offered in the insurance industry M&A market, not every agency is worth 9 times EBITDA (earnings before interest, tax, depreciation and amortization). We can approach the market with optimism, surely. But we should not be overconfident about what value the market “should” bring our businesses because of buyer demand. Buyers still want to acquire organizations that are worth the investment, and they are willing to “pay up” for high quality.

Many believe that, because of high demand, good and below-average firms still deserve the highest market value. But that’s not the case.

Sellers ultimately express that, while money plays into the ultimate decision of which acquirer they’ll partner with, it’s not everything. They want better opportunities for their people and clients. They’re looking for opportunity to grow their post-closing income. They want to know that their people, organization and community will be taken care of after they’re gone. There needs to be a balance between maximizing value and finding a good partner that will fulfill these goals.

At the end of the day, it’s natural to want to maximize the selling price of your organization. But wanting the highest value for your business without having the growth and profitability track record to back that up can create an appearance of greed that turns off most buyers. It is a delicate balance. When you take a step back and consider what you really value—beyond dollars and cents—and what a buyer needs to realize to make the deal attractive, then you may just strike that value-partnership balance. The key is to know where you fit into the market. Be honest about where your organization stands today and how you could improve.

Recognize that, while valuation is certainly at an all-time high, there are still some companies that are good and some that are great. Your multiple will reflect performance and future capabilities. High tide raises all ships, but some boats are just nicer than others.

Now, it’s your decision—will you be good or great?

Market Update

Deal activity in September 2017 was consistent with the prior month, at 29 deal announcements. Year-to-date activity through September is up from last year roughly 7%, at 357 total announcements versus 334 announced transactions through September 2016. Nearly half the transactions announced so far this year have been acquisitions of property-casualty agencies, and more than 85% of all announcements have been traditional retail brokerages.
Acrisure remains the most active buyer in the marketplace, having announced 30 transactions so far year to date. Hub International is a close second at 27 announcements, with BroadStreet Partners and Arthur J. Gallagher at third and fourth with 23 and 21 deal announcements respectively.

During the month, it was announced that private equity firm KKR was selling its minority interest in Alliant Insurance Services to company management. It is estimated that KKR made 2.5 times its original investment in 2012 on the sale, with the original value of the business at $1.8 billion and current valuation at $4.5 billion. Private equity company Stone Point Capital continues to have a stake in Alliant.

It was also announced this month that OneDigital Health and Benefits will be taking over as broker of record on an estimated 8,700 Zenefits insurance accounts, following several years of controversy at Zenefits regarding investigation into its insurance brokerage activity, among other internal disruptions. Zenefits is confident this will create less channel conflict with brokerages in the insurance space and allow it to better serve its brokerage customers.

Trem is SVP at MarshBerry.
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&

Phil Trem President of Financial Advisory, MarshBerry Read More

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