2017 Best Practices Study

For many privately-held brokers, the best M&A opportunities are book of business acquisitions. The insurance agency landscape is littered with books of business controlled by aging producers with no options to perpetuate their ownership internally. Further, many solo producers are dying competitively due to a lack of markets and resources and are in desperate need of a larger business partner. Between these two dynamics, there are a lot of book of business deals out there waiting to be to be done. These books of business often fall below the radar of the larger industry buyers, creating a rare competitive advantage for privately-held brokers with an intimate knowledge of the local landscape and players. One major advantage of book purchases is that they are typically much less complex than full-blown agency acquisitions. Book of business purchases generally involve hiring only a small number of employees (often a producer and one or two service staff), are much easier to price and structure, and are far easier to integrate. Along with the broader M&A market, increased demand for book acquisitions has led to higher valuations. However, even as book valuations have increased, the pricing methodology used by most buyers has remained the same. Books of business are generally priced as a multiple of revenue (as opposed to EBITDA), as this approach is easy to understand, track and implement. Further, book of business transactions are usually priced on a retention basis, with a much smaller portion paid up front. The ultimate purchase price for a book of business acquisition is largely dependent upon how much revenue is retained by the buyer over the first one to two years following closing. Firms that best capitalize on book of business acquisition opportunities know the producers in their market area well, especially the solo practitioners. Like the M&A game, prospecting is key. These solo producers will eventually need a partner, perhaps sooner rather than later. Book of business acquisitions represent a fertile opportunity for privately-held brokers. The key is understanding exactly what the opportunity is and crafting terms to match. A deal structure for a retiring producer, for example, will look much different than the deal for a younger producer with a long runway of future revenue production. As privately-held brokers seek to keep up in the race for resources and scale, mergers represent another potential avenue in the M&A space. A true merger – two or more privately-held brokers coming together as equals – allows firms to increase their size and scope without raising and spending capital on expensive acquisitions. These transactions, often completed with a tax-free, cash-free exchange of stock, can be attractive in certain situations. Mergers, however, present a very high degree of difficulty. In an acquisition, there is generally one buyer and one seller, creating a clean delineation in the negotiation and the decision-making process. Conversely, mergers are successfully driven by reaching consensus across two different groups of shareholders – often a challenging proposition. The key issues on which merger partners must agree include the following:

Relative valuations

Employee benefits plans

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Leadership and decision-making

Firm name

Compensation structures Sensitive family issues

Cultural differences

Historical commitments

Growth strategies

Perpetuation plans