By Tom Sukay, CEO Sukay & Associates
Just when you think you have things figured out, somebody changes the rules of the game. The fourth quarter of each year is very active for insurance agency sales. This year is no exception. We will announce 2 deals in the next several months. We went into each deal with certain preconceptions. The best part of our job is that it never gets boring.We have never been through such an interesting process. One of the things that you will hear from buyers and advisors is that multiples have risen. We would agree with this as a general statement, however, different transactions will yield very different results. It isn’t accurate to state that multiples have risen for all agencies. Let’s look at two agencies as an example. Both agencies are approximately $4 million in annual revenue. This is a size that creates both opportunities and challenges. The size will either create a great deal of interest in the agency or it may result in little interest from potential buyers.
At the moment, there are numerous private equity firms that have established a presence in the insurance brokerage industry. It seems that another firm enters the market each month. In order to be successful, these firms need to establish a foundation agency. There is no ideal size for a foundation agency, but the first deal done by PE firms tends to have revenues of approximately $20 million. This gives them a fresh start and credibility in the market. Unfortunately, there are very few agencies that meet that profile.
What happens after that initial acquisition?
Additional foundations need to be established in other markets. Our experience is that these foundation agencies tend to have revenues of over $5 million. As a result, our $4 million revenue agency may or may not be attractive to the less mature private equity firms. Why would one agency be attractive as a foundation agency and another might not? We have found out that the age of the owners is a significant factor in the interest level of buyers. If one agency has producers and owners in their 40s or early 50s, a buyer would be very interested in the agency, even if they didn’t have a presence in the market. What happens if the owners are all in their 60s? My first question would be, “Why did the agency owners wait so long to sell?”
In our example, the $4 million agency with owners and producers in their 60s would be a hard sell regardless of the circumstances. Some agency owners have taken the stance that they should remain independent for as long as possible and retain the cash flow from the agency. In the end, the price of the agency will not change significantly, so why should they sell until they are ready for retirement?
In the past several months, we have met with a total of nine potential buyers. In order to satisfy my curiosity, I asked each party to estimate the average age of the agencies that they have acquired. I was surprised that all buyers seemed to know the answer to that question. Assuming that they were not exaggerating, the consensus was that the average age was in the early 50s. I was surprised that it was not older. I would have expected mid to late 50s if not older. I also asked each party if they would be interested in an agency where all of the owners and producers were near normal retirement age. As expected, the enthusiasm for this type of agency was less than overwhelming. I believe that this type of strategy is short sighted.
I’m not sure that I’ve ever seen an agency where one or more producers didn’t have the capacity to service a larger book of business. I believe that buyers should be very interested in agencies where the owners are nearing retirement. They may not have to pay a premium for the agency and they could transfer the book of business to under-utilized producers. This results in a win-win for the seller and the buyer.
What other factors impact the wacky world of insurance sales? What is happening with multiples? How does my location or book of business impact your ability to sell your agency? Stay tuned as we continue to publish valuable blogs our new website.
Looking for more?
Download our free whitepaper answering the big question, “What is the Value of My Agency”.
