Financial services firms of all types have seen a significant increase in merger and acquisition (M&A) activity over the last several years.  Insurance agencies, specifically, have seen dramatic increases in M&A activity.  The Hales Report indicated in its January 18, 2022 issue that middle market agency transactions have risen from a total of 464 in 2016, to over 1,100 in 2021.

In recent weeks, I’ve spoken with senior leaders from some of the major buyers active in the market today to find out more about what’s been driving this increase in transactions, what the outlook is for future M&A activity in this sector, and what owners should be considering if they are thinking about selling in the near future.

There are several factors driving increased M&A activity

As valuations have increased in recent years, more agency owners have decided to sell.  At the same time, rising valuations have fueled the appetite of both traditional agency consolidators looking to expand market share, and attracted new buyers to the market such as private equity firms.

Factors increasing agency valuations:

  • Easy access to capital, available at historically low rates, has made it easier for buyers to pay more to acquire valuable top-line revenue.
  • A hard property and casualty (P&C) market in recent years has also driven higher agency revenue leading to higher valuations. This higher agency revenue has been achieved without core organic growth.
  • More buyers competing to buy quality agencies has served to drive up prices.
  • Lack of supply of quality agencies due to increased consolidation has made remaining holdouts even more valuable.

The outlook for continued M&A activity

My conversations with buyers have confirmed there remains plenty of appetite to acquire quality agencies.  The M&A environment, however, is likely to look different than it has in recent years.

  • Credit will be more expensive although capital will likely still be available. Rising interest rates will make buyers more cautious putting pressure on valuations.
  • Cyclical pressure on P&C rates will likely slow revenue growth putting more emphasis on the need for organic growth.
  • Focus on quality as buyers will look for agencies that have demonstrated operational efficiency and expense control.
  • More integration post transaction as buyers look to improve margins by eliminating expense duplication across agencies. Sellers that have sought out buyers promising “no change” to their operating environment may see fewer alternatives available.

The good news is that despite rising interest rates, and a rough start to the year in the stock market, there remains plenty of interest by the most active buyers to acquire quality agencies.  But given the changing financial environment, there are some things you should think about before you to test the waters.  Consider reviewing four key factors as you prepare your firm for sale.

  • People – Secure key producers by making sure employment and compensation contracts are up to date. If senior members are considering retirement following the sale, make sure there are succession plans in place and key clients are retained.
  • Product – Focus on how you are going to grow revenue by having a clear plan and realistic projections. Be sure to include plans for recruiting new producers and expanding product lines.
  • Process – Tighten up operations and be able to demonstrate your attention to risk management and compliance. The bigger the buyer the more important this will be.
  • Profit – Take personal expenses (cars, clubs, etc.) out of your income statement to give as clear a picture as possible of your earnings. Work on both your balance sheet as well.  Try and make your balance sheet as easy to understand as possible.  Eliminate debt and reduce the number of shareholders, particularly those that are not critical to the business.

If you’re considering selling

Overall, this remains a good time to consider selling.  At ButcherJoseph & Co., we work with you through the entire process to help position your firm for a sale, analyze all your options so you can make the best decision for you to maximize value, and execute a sales process with a focus on personal attention.

If you are an owner who is thinking about selling your insurance business, we often begin the process with a complimentary feasibility study analysis, which can help you understand the value of your business and which type of buyer may be best for you. If you are interested in learning more, don’t hesitate to contact us today.