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February 27
13:26 2017

Acquisition Acumen

Acquiring agencies requires a strategy, starting with an appetite

In December 2016 I laid out the housekeeping that an agency owner should consider doing to prepare to acquire smaller firms. We discussed cleaning up the financial picture, strengthening the leadership team, and focusing on the cultural fit. Now what: just start making offers? Hardly.

Acquiring agencies is a lot like any competitive game, process, or endeavor. In sports, professional athletes start with a core strategy (the team has a given style of offense), they do their research (they watch film of their opponents), they practice, and then they execute. Professional athletes don’t leave a game to chance, and they don’t “wing it.”

When you prepare to prospect a new account, you have a sales strategy, you do research on your prospect, and you craft your pitch long before you ever connect with a decision maker or center of influence. At MarshBerry, we like to say that closing an account is not an event—it’s just the next step in a process. Like closing an account or winning the NBA championship, closing an acquisition deal should be a joyous occasion, but not a surprising one, because accounts, championships, and deals are not won; they are earned.

 What is acquisition strategy?

An acquisition strategy is effectively a set of specific guidelines that define a firm’s appetite and its approach to origination, execution, and integration of deals. We believe this strategy should be detailed in a written document that lays out your
firm’s approach and sets guidelines that enable empowered staff members to execute on the strategy. The acquisition strategy should be part of your broader business plan and should be circulated and discussed in detail with the staff members who will participate in the deal process. It’s important that the acquisition strategy be aligned with your firm’s general business strategy and that it be an actual written document. In our experience, firms that commit the strategy to writing and reference it during their quarterly business review meetings are significantly more likely to be successful in achieving their plan. Better yet, management teams that hold each other accountable for staying on course and achieving milestones are the most likely to be successful acquirers.

The components of the strategy may vary, but the basic structure I’ll use here is: An agency needs to appoint a leader, define a stated appetite, create plans for execution (origination, pricing, negotiating, and closing), and integration; this quarter we’ll begin with appetite. The acquisition strategy is holistic by necessity; the individual components are interrelated and must be compatible to achieve the desired outcome.

Before defining an appetite or creating an integration plan, your management team needs a robust business plan that serves the long-term vision of your firm. Although business planning is a whole process in itself, let’s assume that your management team has already answered the key questions: Where are we now? Where do we want the agency to be in five or 10 years? And, finally, how are we going to get there?

Let’s also assume that an acquisition strategy is one of the answers to the “how” question. My question to your management team is: How does the action item “make a bunch of acquisitions” actually drive your firm to achieve its 10-year plan? Growth is an obvious answer, but not all growth is the same. Does your firm have a specialty or generalist focus? Do you intend to change that focus via acquisitions? Does your firm operate in a specific geographic area, and do you plan to expand that area? Is your acquisition plan a simple revenue boost with the intent to leverage your firm’s fixed costs and expand margin? Answering these questions will help you define your firm’s appetite—whom you’re looking for.

 Develop an appetite

Appetite refers to the kinds of firms you are targeting, and it is a direct derivative of the business strategy you are trying to implement. If your firm wants to expand geographically, the target agency in your appetite may be 150 to 200 miles from your home office, with strong local leadership, production, and service capabilities. If expansion into one or more specialty niches is the strategy, your targets are identified experts in a specific niche, with the appropriate expert producers and a strong supporting staff of risk management, claims management, and client service professionals. Specialist targets also have strong relationships in their market, so that’s in your appetite, as well. In each of these cases, you are targeting selling owners and staff who still want to work; you do not want to purchase someone else’s perpetuation problem.

Sometimes, however, you may in fact want to buy a perpetuation problem. Buying a firm where the owner wants to retire is likely to require significant integration, account retention issues, staff turnover (voluntary or involuntary), and lots of management from day one. This target company also will cost less and have upside potential for expense reduction (margin expansion). In the end, if done right, it can be a great financial deal—and if done poorly, it’s more like a donation to a retiring pillar of the insurance brokerage community. If your firm has the acumen to take on this kind of project and make it the great financial deal it could be, you can set your appetite according to owner age, lack of perpetuation candidates, and stale office decor.

Appetite also encompasses size and ownership characteristics. If your agency wants to acquire firms for cash rather than stock, you need to buy firms that are of an appropriate size so you can use a mix of operating cash and debt to close the deal. Determining the size appetite of targets requires some hefty financial modeling and, of course, discussion with the bank of what is possible in terms of potential loans for acquisitions. If you are willing to use stock in the deal, your target acquisition size can increase. Selecting the right seller (who soon will become a partner in your firm), however, is even more vital and must be factored into your appetite.

 The net take

In our experience, the most prolific buyers in the industry have their appetite down pat; they print it on handouts and publish it on their websites. This is not just for show; these buyers want their staff to truly understand the appetite, and they want potential targets to understand it, as well. Once everyone is aligned about what the firm wants, far less time should be wasted discussing basic facts over long lunches with prospects that are never going to work out anyway. Set your appetite based on who you are and what you want to be, then tell the world what you’re up to.

Interested in learning more about acquisition strategy? Great—see you next quarter.

The author

Brad Unger joined Marsh, Berry & Co., Inc., in 2015 as a vice president on the mergers and acquisitions 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 or (440) 220-5435.

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& Source: SNL Financial and other publicly available sources. MarshBerry Opinion & Experience.

 Market update

December had the most deals announced of any month in 2016. Fifty-eight U.S. broker transactions were reported during the month, up from just 16 in November. The preliminary deal count for the entire
year was 442 reported acquisitions, down from 456 in 2015 but still the second highest activity year in the
last decade.

A large portion of the deal activity in December is attributable to the formation of Alera Group, Inc., where 24 separate brokerage entities and one networking organization spread across the country combined to form a new company backed by Genstar Capital, LLC, a private equity brokerage
that formerly invested in Acrisure, LLC, and Confie Seguros Insurance Services. The combined operations represent nearly $160 million in commission income, which would have placed Alera Group at #24 on The Insurance Journal’s Top 100 Brokers for 2016.

Overall, private equity-backed brokerages again represented the largest buying cohort in 2016, accounting for nearly 55% of all reported deals, up from only 46% of deal activity in 2015. The top four buyers in 2016 all have private equity backing and were the same as the most active buyers in 2015, but in a slightly different order. Acrisure reported 38 deals completed for the year, earning it the top spot for the second consecutive year, followed by Hub International Limited (31), BroadStreet Partners, Inc. (28), and AssuredPartners, Inc. (26).

Property/casualty agencies were the most popular targets in 2016 and represented nearly 44% of announced deals during the year, down from 57% in 2015. Multi-line agencies grew, as the percentage of deals announced climbed to over 38% in 2016 from 28% in 2015. Employee benefits and consulting firms represented a similar portion of deals last year vs. 2015
(18% and 15%, respectively).


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