Deloitte reports in its “2022 Insurance M&A Outlook” that broker deal volume was up 40% at the end of 2021 over 2020. Aggregate deal value increased 165% from $21.6 billion in 2020 to $57.5 billion by year-end 2021.
The outlook is for continued strong insurance M&A activity this year. Private equity firms are flush with $2.5 trillion available for opportunities, according to Deloitte. And it appears they love insurance brokers.
“Strategic investors have ample capital available, the stock market appears to be supportive, and there are few anticipated economic, regulatory or tax headwinds,” the report says.
The high level of private equity interest and attractive offers may make it tempting for agency owners to cash out, but it is a mistake to let the fear of missing out (FOMO) overtake rational thinking about their agency and what it is really worth to them.
Owners who are considering a transition in their ownership can be overwhelmed with choices. These include an outright sale, planning a staged transition, bringing in a minority partner, or enabling and selling to internal parties through a perpetuation. Although each choice is very differently structured and its rewards varied, a smart agency principal should examine all options and not be swayed by an attractive price for an outright sale. The other options, if thoughtfully planned, can yield greater financial gain over time, give an owner greater control over their future, benefit those who helped them grow their business and pay tribute to those who took a chance on the owner when he or she first started in the business.
Missing Out on Price or Missing Out on Future Cash Flow?
Lofty numbers created by the M&A froth can cloud a sound economic assessment of continued agency ownership. The stream of future cash flows that the agency generates is both predictable and sustainable. Thus, forgoing this stream of cash flow should be adequately valued in any ownership transition price.
Consider what happens when an agency is completely sold to a third party. In exchange for a lump sum, future cash flows are given up ― as well as the trust that has been earned from clients and relationships. Chances are that the guaranteed portion of the sale may be all that is realized because the owner who sells will not be able to direct the achievement of the full earn-out. The seller will miss the future appreciation of the agency value since they no longer own the shares. Investing their sales proceeds elsewhere likely will not produce returns as great as running and owning a well-performing agency.
But if the owner instead begins to perpetuate the agency ― even if just a small portion is sold to the best people ― chances are the firm will be more valuable in coming years. Why? The (smaller) ownership share may be worth more down the road than the full share would be worth today to an acquirer. Further, the perpetuation candidates with an ownership stake may drive more value for the firm. Ownership creates the ultimate motivation for future earnings.
Consider the Agency’s Legacy
Independent agency owners typically don’t ride off into the sunset once they sell, so it’s important for owners to think about legacy. The most successful ownership transitions take into consideration the effect on agency employees, clients and the community. Ensuring continued partnership and success for these groups can be a sobering thought if a seller is asked to place a price on these groups’ roles in their success.
Ultimately, it is a seller’s market for agency owners, so an agency owner should do what best aligns with their long-term priorities. They have many options to consider other than an outright sale. They should consider what matters most to them and avoid pressure caused by FOMO.
Matt Sprang is senior vice president, director of agency banking, for InsurBanc (InsurBanc.com), a division of Connecticut Community Bank, N.A., a commercial bank specializing in financial products and services nationally for the independent insurance distribution community. Started in 2001 as a vision of the Big “I,” InsurBanc helps agencies by financing acquisitions and perpetuations and provides cash management solutions.