2016 BPS Study

Brokerage Industry Perspectives How Best Practices agencies are leading the way

Private Equity's Rise to Dominance: Share of Deal Activity

46%

44% 43%

31%

28%

22%

12% 14% 15%

4%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: SNL Financial 

Most agency shareholders face a dilemma created by this frothy market. Their internal “going concern” value is solid,  but it still represents only a fraction of what they believe they could get from a third‐party buyer. Older shareholders  want to sell and capture a higher value. Younger shareholders want to remain independent, rather than working for  someone else. Thus, both sides agree that the firm must do whatever it can to close the gap between the lower internal  value and the higher “street value.”   But how can this be accomplished? The higher values delivered by third‐party buyers are typically driven in large part by  expense reductions (producer compensation, owner compensation, staffing reductions, etc.) that the seller must agree  to implement after the deal is closed. Today’s agency owners are increasingly recognizing that they can narrow the  difference between internal and external value by getting more serious about making these changes on their own,  without selling the business. If a third‐party buyer can justify a higher value by tightening the agency’s belt, there is no  reason why this cannot be accomplished internally, too.   Another strategy that the active M&A marketplace has produced is an offensive one. If you don’t want to join them,  beat them! After years of believing they were priced out of the acquisition market, today’s BPS firms are jumping into  the acquisition fray. They are recognizing that in this hyper‐competitive market, although they will likely have to pay top  dollar for an acquisition, acquisitions can still be worth doing. They typically focus on smaller, local agencies owned by  friends or respected competitors.   We noted earlier that acquisition activity in 2015 was dominated by private equity buyers. But it was also a record year  for privately‐held buyers, that did a total of 115 deals nationally, besting the previous high of 90 set in 2012.   The  BPS Study  indicates that larger BPS firms were active acquirers in 2015, while only roughly 1 in 10 BPS firms under  $10 million made an acquisition. Generally, larger firms have easier access to cheaper capital, which makes deals easier.  Further, it is often the larger firms that are best positioned to achieve the synergies required to ensure that deals are  accretive to shareholders. 

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