The importance of having a sound
strategy in place—and what that entails
By Lori Widmer
When the insurance industry exited 2023, the consensus was that, in terms of mergers and acquisitions, the year had ended on a rather sluggish note. According to Bain & Company data, for instance, deal value grew by 2% but was dampened by an 8% drop in deal volume. A Deloitte M&A outlook report echoes Bain’s: fewer transactions across the board.
That was then. What has 2024 delivered so far? “I think it’s busier than ever,” says Carey Wallace, founder and consultant with Agency Focus, an independent insurance agency consulting firm. “There are more people considering the questions, ‘Is now the time?’ ‘Is it the right time for me to exit?’
“And I think those agencies that have invested in their infrastructure are well positioned to grow by acquisition. There’s actually more activity now than I’ve ever seen.”
Why so much activity now? Wallace cites a few factors: First, a significant number of agency owners are at or beyond retirement age. Second, in an environment of ballooning innovation, many agency owners may not want to invest in technology and retool their agency processes at this late stage.
“I think it’s more of the state of the market and the state of the forces inside market” that are keeping some agency owners from innovating, Wallace says. In this hard market, she adds, the focus remains on retaining business and attracting new talent.
However, the double-edged sword in the scenario is that, in order to attract talent, agencies should be innovating and adopting newer tech solutions. “I have a twenty-five-year-old daughter,” Wallace explains. “If she were going to choose between two agencies and one had the technology to tell her where to start and how to be successful, and the other did not, where do you think she’s going?”
It’s not merely a focus on attracting talent. Wallace says that in a competitive market, agencies need to be attracting buyers, as well. “When interest rates were low, there were a lot of buyers” which meant that agencies didn’t have to work as hard to attract one. However, when interest rates are higher, buyers “are far more thorough in their due diligence.”
Those agencies that are incredibly well run, she says, will fare much better in the marketplace. Not that agencies won’t find a buyer, but Wallace believes they won’t be able to command the same price if there is a question about profitability, future performance or soundness of the investment.
“Many sellers want to take care of their people first and foremost. They want to get the right price for their agency, but they want to do that while making sure they take care of their
customers and the people who work for them.”
—Carey Wallace
Founder and Consultant
Agency Focus
Building a more attractive package
If it sounds like agencies should have a strategy in place before trying to find a deal, that’s because they should. “You have to think with the end in mind,” Wallace explains. “What am I trying to do? Am I trying to transition internally? Am I trying to transition externally? Am I trying to get to the highest profitability? Am I picking the right carriers? Am I picking the right niches? Am I picking the right partners?” Having an end goal makes the job of prepping the business for sale much more lucrative, she says.
With a goal in place, Wallace suggests reviewing the agency. “Look at your business and understand what decisions you can make now that will reap benefits, rather than waiting or letting the buyer do that.”
She cites the example of staffing. Making long-overdue staffing changes prior to going on the market means that the value of the agency increases. The more efficient and profitable the business before any sale, the better the value of the agency, she says.
Another area to concentrate on is growth. “Growth and profitability are the two main drivers of the value of a business. Look at your weaknesses and try to strengthen them.”
One thing an agency can do, Wallace says, is develop a niche. “A niche gives agencies the potential to be far more efficient and selective in what they invest in.” A niche can narrow down the selection of tech solutions, for example, because the needs are more specific. Exclusivity to carriers or programs can increase the agency’s value and profitability.
However, niche business comes with a caveat. Selling a niche agency means that the pool of buyers is smaller. “Bigger buyers are going to be very interested in you, but peer-to-peer might not be, as they may not have the expertise to continue high performance in a particular niche,” she adds.
Then there’s technology. Should an agency adopt new technology before an acquisition deal is sought? “If you’re an agency owner, you need to know your timeline,” says Wallace. Technology is not immediately implemented, and it often requires a cultural shift within the agency. New processes and procedures need to be worked out, and there needs to be enough time to actually launch and get staff up to speed.
In any scenario, sellers—and buyers—should be sure to communicate their priorities. Many times, the culture is the biggest factor to consider, not price. “Many sellers want to take care of their people first and foremost. They want to get the right price for their agency, but they want to do that while making sure they take care of their customers and the people who work for them.”
For buyers, Wallace says they should be flexible in negotiations and meet the sellers where they are. Also, “If a buyer wants to be a strong acquirer, they need to get their own financial strength in order.”
“When interest rates were low, there were a lot of buyers”
which meant that agencies didn’t have to work as hard to attract a buyer.
However, when interest rates are higher, buyers “are far more thorough in their due diligence.”
—Carey Wallace
Another area to concentrate on is growth. “Growth and profitability are the two main drivers of the value of a business. Look at your weaknesses and try to strengthen them.”
One thing an agency can do, Wallace says, is develop a niche. “A niche gives agencies the potential to be far more efficient and selective in what they invest in.” A niche can narrow down the selection of tech solutions, for example, because the needs are more specific. Exclusivity to carriers or programs can increase the agency’s value and profitability.
However, niche business comes with a caveat. Selling a niche agency means that the pool of buyers is smaller. “Bigger buyers are going to be very interested in you, but peer-to-peer might not be, as they may not have the expertise to continue high performance in a particular niche,” she adds.
Then there’s technology. Should an agency adopt new technology before an acquisition deal is sought? “If you’re an agency owner, you need to know your timeline,” says Wallace. Technology is not immediately implemented, and it often requires a cultural shift within the agency. New processes and procedures need to be worked out, and there needs to be enough time to actually launch and get staff up to speed.
In any scenario, sellers—and buyers—should be sure to communicate their priorities. Many times, the culture is the biggest factor to consider, not price. “Many sellers want to take care of their people first and foremost. They want to get the right price for their agency, but they want to do that while making sure they take care of their customers and the people who work for them.”
For buyers, Wallace says they should be flexible in negotiations and meet the sellers where they are. Also, “If a buyer wants to be a strong acquirer, they need to get their own financial strength in order.”
Another line item for buyers: Know what will strengthen your agency. “Don’t buy an agency that’s going to exacerbate your weaknesses. Know what your profile is and make sure that any potential acquisition will round out your agency.”
“Don’t buy an agency that’s going
to exacerbate your weaknesses.
Know what your profile is and make
sure that any potential acquisition will round out your agency.”
—Carey Wallace
The agency network angle
Wallace highly recommends agencies become part of an agency network. However, not all agency networks are created equal. The network, she says, should allow you to operate efficiently through various services and resources.
The right network, she says, “can make you a much more competitive buyer because you’ve got access to great markets, strong commission structures, and contingency opportunities that would not exist on your own in some cases. You also will have access to resources that can improve your agency’s efficiency and therefore your agency’s profitability.”
Networks should not prohibit agencies from having the freedom to consider different buyers or otherwise limit the ability to sell. “Not all networks have the same kind of contract, not all networks have the same kind of structure, and some take ownership in your book or have a first right of refusal to purchase the agency. It’s important to understand all of the terms of the contract that you’re under, not sign it and forget it.”
For both buyers and sellers, understanding what each brings to the M&A deal is an essential first step. Matching cultures and understanding operations and how the deal will impact customers and employees going forward is a balancing act, but Wallace thinks the more transparency at the outset, the more satisfying the transaction can be for both sides.
Using the strength of an agency network can be a differentiator and create a win-win situation for both parties as well as ensure a smooth transition and ultimately a better outcome.
Wallace will be sharing her insight on these and other M&A and agency network-related topics at the upcoming Insurance Networks Alliance annual meeting in January. For more information, visit bit.ly/INA_MA.
The author
Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.
