Acting in the best interest of the
owner or the shareholders
As the main owner and operator of your firm, you need to take
time to focus on the value of the business and not just on how to increase your take-home pay.
By James Graham, CVA
The largest businesses in the world tend to have thousands of owners and are often run by non-material owner employees. Think of name-brand publicly traded firms such as Apple or Amazon. Tim Cook, the CEO of Apple, owns only a fraction of a percent of Apple’s equity, while Jeff Bezos owns only slightly more than 9% of Amazon. Jeff’s higher ownership percentage is typical among founder-led companies; however, one day Jeff Bezos won’t be leading Amazon and the company will be wholly run by someone with a tiny percentage of ownership. To further illustrate the point, the largest insurance broker in the world, Marsh McLennan Companies, Inc., is run by CEO John Doyle, who owns a fraction of a percent of the firm.
Despite these relatively small ownership percentages, these and other CEOs are tasked with increasing shareholder value. While they benefit from accomplishing this goal, they may have a different view than shareholders on what to prioritize and what is an acceptable level of risk and return. Furthermore, CEOs and other business managers often think that they are taking a longer view than financial investors, leading to conflict when management teams make decisions that result in lower shareholder returns today to achieve them in the future.
The conflict between CEOs/business management teams and shareholders is encapsulated in what is called the principal-agent problem. This problem arises anytime an agent is tasked to act on behalf of a principal or other entity. The goal of most businesses is to craft incentive structures to reduce the gap between agents and principals to a level where both parties can enjoy success.
In contrast to large corporations, the majority of insurance agencies in the United States are owned by a single owner; or if they have many owners, there is one owner who controls the majority of the shares. If you are this owner, you may believe that you don’t have to deal with the principal-agent problem because you are both the principal and the agent. Meaning, you are tasked with operating the business, enriching yourself and your management team via W-2 compensation, and you are tasked with growing the value of the firm’s equity. The reality is that the conflict still exists, but it now exists within you. You are now torn between two worlds and, more often than not, we see owners act in the interest of the agent or the CEO and not in the interest of the shareholders.
As the main owner and operator of your firm, you need to take time to focus on the value of the business and not just on how to increase your take-home pay. Focusing on income growth or tax strategies that reduce taxes today often sacrifice long-term share value as capital isn’t efficiently deployed. As the CEO and owner, it is your main job to increase shareholder value. The first step is to learn about your firm’s value and the levers you can pull to increase value. One day you will have to sell the equity in your firm, and if you don’t think about that fact until you decide it is time to sell, you may leave significant value on the table.
The author
James Graham joined MarshBerry in 2015 and is a director on MarshBerry’s Financial Advisory team in its Dana Point, California, office. His expertise includes merger and acquisition advisory, capital raising, business valuation, perpetuation and succession planning, and strategic planning. James provides his clients with customized financial and capital strategies to help them accomplish their goals. He also is a facilitator for MarshBerry’s Connect Network and actively publishes articles relevant to the insurance distribution marketplace.
Prior to joining MarshBerry, James was a senior consultant with Deloitte Consulting LLP.James currently maintains the FINRA Securities Industry Essentials (SIE®) Exam in addition to the Series 62, 79 and 63 FINRA Registrations through MarshBerry Capital, LLC, the affiliated FINRA-registered broker-dealer of Marsh, Berry & Co., LLC. He earned a Bachelor of Science in Finance from Azusa Pacific University and a Master’s in Business Administration (MBA) from George Mason University. He is also a Certified Valuation Analyst (CVA). You can contact him at James.Graham@MarshBerry.com or (949) 272-0351.
M&A Market Update:
As of March 31, 2024, there have been 114 announced insurance distribution mergers and acquisitions (M&A) transactions in the United States—a 16% increase in total deals compared to this time in 2023, which ended Q1 with 98 announced transactions.
Private capital-backed buyers accounted for 85 (74.6%) of the 114 transactions through March. This represents a substantial increase since 2019, when private capital-backed buyers accounted for 59.3% of all transactions.
Independent agencies have accounted for 16 deals so far in 2024, representing 14.0% of the market, a slight decrease from 2023 when independent agency acquisitions represented 15.6% of the market. Transactions by bank buyers continued to fall as a percentage of overall deals, declining from 18 total transactions in 2022 to nine total transactions in 2023—an all-time low. Bank buyers have recorded only one transaction in 2024, representing less than 1% of the market.
Deal activity from the top 10 buyers accounted for 62.3% of all announced transactions through March, while the top three (BroadStreet Partners, Hub International, and Integrity Marketing Group) accounted for 29.8% of the 114 total transactions. For comparison, the top 10 buyers in all of 2023 accounted for 41.9% of total transactions, with the top three representing 16.2%.
Despite a down year in 2023 for M&A transactions, valuations are holding steady in 2024, even rising, driven by the need for expertise at high-performing platform organizations. n
Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., LLC. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122; (440) 354-3230. 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. 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 and other publicly available sources.
