ACQUISITION ACUMEN
Local and regional buyers can compete on deals where they solve problems that national competitors cannot
I was talking to an agent at MarshBerry’s 360 seminar recently when the topic of acquiring agencies came up. He’s looking to acquire firms and was running down his wish list when it struck me how routine his appetite was: strong organic growth, committed principals who want to remain in place, specialized niche or focus area, etc., etc., etc. Also, he did not want to pay a lot, and he preferred to pay over time, with the seller taking notes rather than cash—but not getting any equity in the parent company.
What struck me was not just how common this appetite is, but how nearly impossible it is to achieve. It’s like saying: “I want to buy a Rolls Royce Phantom and keep the seller on as my driver. However, I want to pay the price of a Lincoln Navigator and I want 0% financing for 60 months from the same guy who will drive me around for the next three years.”
Let’s be clear: That appetite is the gold standard, and many national buyers would happily meet that seller. The difference is that a national buyer will likely pay handsomely, and largely in cash, for an agency whose performance is considerably better than average. The national buyer also would give the seller an opportunity to receive stock in the parent, therefore aligning interests and potentially creating more wealth for the seller.
When talking with national buyers, I regularly hear, “We don’t want to buy someone else’s perpetuation problem.” These buyerswant to buy a firm—a company capable of future growth—not a book, which is viewed to be in run-off.
Sure, stock in a private equity-backed firm has its risks; these go with its large potential rewards. However, receiving mostly cash up front, plus potentially valuable stock, can be a much more compelling story than asking a seller to bear the financial risk of his own sale (i.e., receive seller notes with limited cash) without participating in any of the reward that benefits the buyer (i.e., receive no equity in the larger firm).
So what’s the point of this? The point is that you need to decide who you are and what competitive advantage you have relative to the large national buyers. If you’re a local or regional agency, you have an ability to do deals that the large national buyers can’t or won’t do.
Let’s discuss two situations.
Perpetuation solution
When talking with national buyers, I regularly hear, “We don’t want to buy someone else’s perpetuation problem.” These buyers want to buy a firm—a company capable of future growth—not a book, which is viewed to be in run-off. This means that, typically, they are uninterested in agencies with a single producer who wants to ride off into the sunset and capture the last bit of value on the way out the door. National buyers are looking for leaders and producers who are committed to staying for a period of time, to help grow the business and help ensure a smooth transition.
Let me be clear about one thing: Those higher valuations that you hear of—you know, the ones that seem crazy—typically are relevant only to firms where the leadership is expected to remain in place and grow the business.
A national buyer’s appetite and the related pricing levels are not just about the potential for future growth, but they also are about the risk in the underlying portfolio. Insurance is a great business in that an agency with below-average service can have 85% retention, based on the producer’s relationships with the clients, and based on the clients’ inertia.
The retention math changes significantly when the key relationship is broken—when the producer retires. However, this is an area where a local or regional acquirer could change the curve. If one local firm buys another local firm’s book, the buyer might have the ability to build the necessary relationship and lock in the business.
This is a situation where there is a gap in the perceived and/or actual risk among the different types of buyers, and the local and regional buyer is at the advantage; a local or regional firm may actually be able to make a deal work where a national firm cannot.
Because of the asymmetric risk profile, and because of the reduced competition among suitors, the valuation on these deals should be lower, making them potentially profitable projects for local and regional buyers to pursue.
Upstart producer
Another area where large national buyers struggle is the upstart experienced producer, or the producer who “fell out of” a firm acquired by a large national buyer. Envision this as a small shop with a single producer who recently left a larger firm. Perhaps that producer was not an owner of the firm when it sold or perhaps was not a cultural fit for the new buyer. The producer is in the mid-30s to early 40s and has a few staff members who help manage the $750,000 of revenue that’s generated and now needs help and needs to partner with a larger firm.
Some national buyers will be interested in working with this producer, but the producer is unlikely to want to work with them. There is scar tissue and memories only of the negative things related to the producer’s experience at the prior large firm.
The key here is that producers typically want to control their own destiny; they will want to have some say over career direction. The local or regional buyer could solve this issue by giving the producer equity in the broader firm. By merging this producer’s company into the larger firm, the buyer can create long-term alignment and a sense of stability with some control for the seller.
This is not to say that the seller will own much stock of the buyer, and it does not mean that the seller will have a management or senior leadership role at the buyer’s firm. And it most certainly does not mean that this deal will be easy. Giving someone ownership in your firm requires significant vetting of cultural fit and a clear understanding of roles and responsibilities going forward, but when done right it can be very powerful.
The net take
An acquisition can be a powerful way to increase a local or regional agency’s scale and profitability, and it can create increased value for that local firm that may eventually sell to a national concern. The trick to pursuing this strategy is finding opportunities where your firm isuniquely capable of executing the deal.
It is important that when entering these transactions, significant due diligence and integration planning are necessary to make sure that you know what you’re getting and what you’re going to turn it into. Make surethat you cover the full diligence basicsand be certain to focus on how you’ll execute your unique advantage once the deal closes.
The author
Brad Unger joined Marsh, Berry & Co., Inc. (“MarshBerry”) in 2015 as a vice president on the Mergers & Acquisitions (M&A) team. In addition to his M&A advisory responsibilities, Brad also is involved with the firm’s financial consulting business. Contact Brad at Brad.Unger@MarshBerry.com or (440) 220-5435.
MARKET UPDATE
May and June deal announcements this year were up, compared to April 2017 and compared to May and June of 2016. May deal announcements were 38, up from 33 in May 2016, and June this year saw 42 announcements, up from 37 in the same month a year ago. The current year-to-date pace of announcements has now accelerated past last year at 239 announced transactions, compared to 222 through June 2016.
Acrisure, LLC (“Acrisure”), continues to be the most active buyer in the marketplace year-to-date, with 24 announcements through June, followed still by BroadStreet Partners, Inc., and Arthur J. Gallagher & Co. at 19 and 17 announcements, respectively. Hub International Limited (“Hub”) is a close fourth in the marketplace, with 16 announcements in 2017 through June.
Combined, these four buyers represent almost 32% of all insurance brokerage merger and acquisition announcements so far in 2017.
In late June, it was announced that USI Insurance Services, LLC (“USI”), had won the bid to purchase the U.S. commercial and employee benefits insurance services division of Wells Fargo & Company. The sale is expected to close in the fourth quarter of 2017 and will exclude the personal lines insurance division. USI previously purchased 42 insurance brokerage offices from Wells Fargo in 2014.
May 1 marked the first transactionfor the newly formed Alera Group, Inc.(“Alera”), after its formation from the combination of 24 independent agencieson December 30, 2016, backed by private equity investor Genstar Capital, LLC. Alera purchased Pennsylvania-based Strewig Bonding Agency, Inc., which specializes in bonding and surety.
Also notable during May, Cleveland, Ohio-based Britton Gallagher & Associates, Inc. (“Britton Gallagher”), announced its sale to Acrisure.
With roughly 50 employees, Britton Gallagher is a multi-line broker with niche specialties in several areas, including pyrotechnics, life sciences, and executive risk. This transaction marks Acrisure’s first entrance into the Ohio market and represents a departure from its typical approach of not announcing transaction targets to the public.
Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc. Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. Please feel free to send any announcements to M&A@MarshBerry.com. Source: S&P Global Market Intelligence and other publicly available sources. MarshBerry Opinion & Experience.
