Acquisition Acumen
The M&A market is hot, and everything says now’s the time to acquire a business and grow. But is that really the best idea for your firm?
Everyone’s doing it. At least that’s the feeling you get when you read the merger and acquisition (M&A) headlines and scroll down the list of recent done deals. The market is dynamic—a flurry, even. This is a fact, with Marsh, Berry & Company, Inc. (“MarshBerry”) tracking and recording within its proprietary database a record number of M&A transactions in 2017 in the insurance brokerage space, with no signs of slowing this year. But is everyone in the position to win as a buyer or seller? Is M&A the answer to growth, value and perpetuation?
The answer: Possibly, if you have a strategic, financially sound plan in place and a purpose for engaging in the M&A market.
In other words, what is your end game? Why do you want to acquire another firm? What goals do you have in mind? What do you hope to achieve from a financial, strategic and succession perspective? Where does your business stand today, and how would an acquisition elevate your organization?
There’s a Plan A—and a Plan B. In our experience, those plans should be put in place before the acquisition takes place.
It may seem like everyone is jumping on the M&A bandwagon—that every business is playing the M&A field, and that every business is positioned to win. After all, as many in the insurance brokerage industry say, there has never been a better time to buy, right? Well, it’s certainly never been a better time to sell.
Although the market, availability of capital and level of M&A activity are creating a welcome environment for businesses to grow through acquisition, that does not mean that every organization will succeed at doing so. M&A isn’t a guaranteed way to grow. It’s not a sure-fire way to land a sustainable book of business or continue your firm’s legacy. In this highly attractive market, we encourage you to press the pause button—to stop and consider: Is entering the M&A market really the right decision for your business? What do you expect to get out of a deal? What do you bring to the table that would make your firm a valuable partner? (Basically, what can you give and what do you want to get?)
Let’s investigate.
A financial play
Based on MarshBerry’s proprietary database, we are seeing that the transaction multiples for large-platform firms are highly attractive, generally more so than those of smaller roll-in firms. Maybe you’re thinking that you want to sell your firm eventually and that if you can buy a business for $1 million and sell it for $3 million next year, that’s an incredible deal. Buy low, sell high, right? This may be true, but what is your timeframe for holding the business? If you buy a company that is valued lower and then struggle to retain or grow the book of business, what are you left with after a year—or three years? The point: Know the real value of the business, including the quality of the book of business and the company’s culture.
If you plan to acquire a firm for financial reasons, make sure you get what you’re paying for. We believe it’s a good idea to engage a third party to vet the candidates you’re considering. Second, consider your timeframe and whether the value is sustainable. You want to acquire a specialty that local competitors cannot compete with, or a book of business with talent you can leverage. Without those things, the accounts you’re buying will eventually go away. Be sure the value you acquire will sustain and, better yet, grow.
Finally, go in with an exit strategy. How will you sell the business in the future, and for how much? Will your investment deliver on these goals? There’s no crystal ball, but by taking the time to carefully vet the business you can uncover facts—the risk factors and ways to mitigate them—that will help you analyze potential outcomes. A smart financial buyer forecasts the years ahead and puts plans in place to enhance profit margin or reduce expenses in case revenue declines. There’s a Plan A—and a Plan B. In our experience, those plans should be put in place before the acquisition takes place.
The strategic buyer is interested in acquisitions that support growth objectives. That could mean expanding into new markets or providing new specialties. It can mean crossing state borders or moving into a new part of the town you’re operating in now. Regardless, there’s a plan to get bigger, and “buying growth” may be an answer.
Growth through acquisition can be a successful endeavor when buyers partner with like-minded firms that share their goals. However, it’s important to rigorously vet prospects and to evaluate their team/talent, financial performance, technology, customer retention/experience, and overall operations. Be sure the firm has the capacity to grow—and that the business is in a growth market. (Not all regions are trending up.) Most important: Be sure there is a cultural fit. A strategic buyer is looking to acquire a business for the long term and needs to know that the combined organization will thrive, not just survive.
Succession plan
We see this scenario a lot. An established firm’s owner is in her mid-60s and is considering what’s next for the business. Recognizing that the existing leadership will not carry on the business, she begins to look outside the organization. There’s an agency in town—a friendly competitor, run by a 40-something who is motivated, investing in her own firm and looking to grow. The two owners start talking, and the seasoned owner wonders, “Could buying her firm be my succession plan?”
There are many examples of successful perpetuation through acquisition. But in addition to the financial and strategic M&A plays, there must be a culture and values fit for this plan to work. What is the younger owner’s plan for her business? Ideally, in this scenario, the seasoned buyer’s firm and the younger seller’s firm would merge, realizing economies of scale and leveraging operational efficiencies while keeping both parties as stockholders. A plan would be put in place so the younger partner could buy out the veteran owner’s share, and this new leader would continue to run and grow the business. The successor would retire, maximizing her life’s investment in her former company.
The key is to ensure that the buyer and seller are on the same page. The succession plan must exist before the sale. There must be complete transparency and, again, careful vetting to ensure a financial, cultural and operational match.
Is now “the time” to buy and sell? Sure, now is a great time to enter the M&A market—that is, if you know your end game. Why do you want to buy a business now? Are you looking to get one more financial boost before you sell your firm? Is your own operation prepared to leverage new talent and sustain growth? What do you expect to get out of the deal?
Take the time to do some business soul searching before you jump into the market. Consult with a professional who can give you insight about your own business. It’s tough to take a candid look when you’re busy with the daily grind, managing people and driving sales. Put a plan down on paper. Then identify what is an ideal seller match for your business so you’re focused on prospects that will help you realize your goals.
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. MarshBerry helps insurance agents, brokers and carriers as they work to maximize their value through a variety of industry-specific services. Contact Brad at Brad.Unger@MarshBerry.com or (440) 220-5435.
MARKET UPDATE
The first quarter of 2018 is showing signs of a slowdown in deal count, but we believe it is just a matter of slow announcements. The 23 announced deals in March bring the three-month total to 92 transactions. This is in line with totals in 2014 but well behind 2015-2017 numbers, which ranged from 120 to 145 deals in the first quarter. Most buyers, however, will tell you that they are as active as ever.
Alera Group, Inc., is leading the charge with eight announced deals year to date. They are followed closely by BroadStreet Partners, Inc., and HUB International Ltd., tied at seven domestic deals announced through March.
Today’s big news on the street is the announcement that USI Insurance Services has signed an agreement to buy the insurance operation of KeyBank (Key Insurance & Benefits Services, Inc.). This is a top-100 broker and was the insurance operation of First Niagara Risk Management prior to the bank being acquired by KeyBank in 2016. There are currently rumors of at least one other top-100 bank-owned agency on the market. If both of these deals go through, that would be three top-100 bank-owned agencies sold in the last 12 months, Wells Fargo Insurance Services USA being the other when it sold to USI in 2017.
Although banks dominated the M&A space in the mid-2000s, they have been relatively quiet since coming out of the Great Recession. Bank-owned agencies completed 22 deals in 2017, which was roughly 4% of the total announced deal flow. Year to date, five different bank-owned agencies have completed five acquisitions. We believe that bank-owned brokers are still a viable buyer segment, although there are fewer dominant acquirers than existed a decade ago.
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; http://www.insuranceinsider.com/; http://www.insurancejournal.com; http://www.businessinsurance.com/; https://www.epicbrokers.com/ and other publicly available sources and MarshBerry Opinion & Experience
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