Acquisition Acumen

By Brad Unger

ARE YOU BUYER MATERIAL?

Four factors that are driving buyers to the negotiating table

Many agencies might not have considered selling in the past, but today’s attractive market has opened their eyes. For some, the time is right and valuation multiples are enticing. Agency owners are looking ahead: What’s the perpetuation plan? Will I get the same value from the business if I hold on to it for five more years? Many owners see an opportunity to leverage the market’s appealing conditions. They’re deciding to go ahead and sell. This can be great news for buyers too.

With more sellers in the market, buyers are more likely to find an ideal fit for their agencies, provided they can differentiate themselves from the pack. If buyers take the time to map out a thoughtful acquisition strategy (“Why do we want to grow through acquisitions?” and “What do we hope to gain by growing this way?”), they can target sellers that align with their goals and explain to the sellers why they are a good strategic fit for each other.

Should you be a buyer in today’s market? As you consider how to increase revenue, expand geographically, introduce new products and acquire top talent, do you have the ability to achieve these organically, or is it time to consider being a buyer?

Here are some key strategies that we see driving buyers to the market. Are you next?

Increasing scale. Most buyers achieve some economies of scale when they make an acquisition—and contingent commissions are a significant advantage of scaling up. Larger agencies and brokerages get higher commission rates.

A strategic acquisition could enable you to expand your brand to new territory so you can increase your client base and your revenue.

Another key driver of scale is related to expense reduction. Larger agencies realize economies of scale in technology or accounting and finance. With greater scale, these critical back-end expenses are spread out over a larger revenue base and have less of a negative impact on the bottom line. For the most part, the same technologies and accounting practices are necessary for agencies of any size. The difference is that larger firms have more revenue to offset the costs, making those operating and overhead outlays a much smaller piece of the expense pie.

But there’s a catch here: You need to be willing and able to achieve these expense synergies, which may mean you need to eliminate redundant employees or take other measures to reduce costs.

Growing the footprint. What opportunities for growth exist in your current market? For some agencies located in slow- or no-growth regions, expanding the client base is not so easy. Producers may feel tapped out, which is a good reason to consider widening the agency’s footprint through acquisition. Even smaller firms that do not “own” their local markets may find they’ve hit a wall—and unless they look beyond their existing service area, they may find it impossible to achieve growth goals. A strategic acquisition could enable you to expand your brand to new territory so you can increase your client base and your revenue. Additionally, geographic expansion can increase diversification, which is critical for sustainability.

To expand geographically, some firms identify attractive markets, plant a flag there with a platform acquisition, then continue acquiring “bolt-on” businesses to solidify their presence. Another agency may realize that it can expand its existing market as opposed to moving to a different region or state. It’s always a good idea for buyers to consult with professionals in states where they are not currently doing business so they can become familiar with regulations and market conditions. With knowledge of the rules and regulations, you can go into the new market with your eyes wide open and try to mitigate risk.

The key: Do your homework on new markets you are considering before pursuing an acquisition.

Acquiring expertise. An advanced play for buyers that have already achieved some scale and expanded geographically is to acquire specific industry expertise. These buyers may realize that they could cross-sell to existing clients if they could offer a specific product or service.

Examples of specialty areas are healthcare, oil and gas, surety, hospitality, and professional liability. A prospective buyer may identify a gap in the firm’s capabilities and acquire an agency that has a specialty it desires to offer. Adding expertise can solidify clients and provide a tool for producers to capture new business they couldn’t have written before the acquisition.

Mining leadership talent. Many agencies and brokerages pursue acquisitions as a strategy to bring in new leadership talent. Whether an acquisition strategy is focused on increasing scale, expanding geographically or adding a specialty, talent is a consistent demand. Some buyers are seeking stars to fill specific leadership roles. They’re looking for individuals to support a succession strategy or to help them achieve specific strategic objectives. A prospective buyer may know that the firm eventually will lose a key leader and be looking for a high-performing individual to groom for that position. When knowledgeable buyers encounter valuable talent, they recognize it, and the desire to acquire this talent can motivate them to pursue an acquisition.

The takeaway

Here’s the takeaway: Decide what you want to achieve by acquiring another firm and develop a strategy to attain your objectives. Sit down with your management team and explore how being a buyer could benefit your firm. Put pen to paper—go through the exercise of writing down what your agency hopes to achieve from an acquisition.

The author

Brad Unger joined Marsh, Berry & Co., Inc. (MarshBerry) in 2015 as a vice president on the mergers and acquisitions team. He also is involved with the firm’s financial consulting business. MarshBerry helps agents, brokers and carriers as they work to maximize their value by providing industry-specific services. Contact Brad at Brad.Unger@MarshBerry.com or (440) 220-5435.

Securities offered through MarshBerry Capital, Inc., member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc., 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122;

(440) 354-3230.

MARKET UPDATE

Merger and acquisition (M&A) activity within the insurance brokerage community did not lose steam at all in 2018. The year finished with 580 announced transactions compared to 557 in 2017.

Nearly 80% of the announced transactions within the space were completed by independent insurance agencies, similar with 2017. The majority of these agency buyers were private-equity backed, as this subsegment completed almost 60% of all transactions during the year. The most active three buyers during 2018 were: Acrisure, LLC (59), BroadStreet Partners, Inc. (37) and Alera Group, Inc. (33), all private-equity backed in some form.

More than half of the total transactions during the year were of Property and Casualty (P-C) agencies, while the remaining 45% was evenly split between Employee Benefits agencies and those that have both P-C and Employee Benefits (multiline agencies).

During the fourth quarter, Acrisure, LLC, the most active buyer since 2015, announced that several of its private-equity partners had increased their investments in the business. The increase in investments from its partners implies an enterprise value of more than $7 billion, or over two times the value Acrisure garnered in 2016 when a $2.9 million management buyout was completed. Revenue has grown on an annualizedbasis over that timeframe from roughly $650 million to more than $1.2 billion, and the firm noted it plans to close more than 100 transactions during 2019. Although the company has several institutional investors, the majority(83%) of Acrisure stock is in the hands of its employees. This transaction, along with several other recent transactions within the large brokers, indicates that valuations and private equity appetite within the brokerage space are not likely to wane in the near term.

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; 2018 full year statistics are preliminary and may change in future publications. Please feel free to send any announcements to M&A@MarshBerry.com.

Source: S&P Global Market Intelligence; Acrisure, LLC; other publicly available sources and MarshBerry Opinion & Experience