2021 Best Practices Study

Adapting to a Rapidly Changing Environment

Internal Perpetuation Best Practices

Perpetuation Then and Now: Maintaining Private Ownership in 2021

Despite the M&A frenzy that has dominated the independent insurance marketplace for the past decade, the reality is that most independent brokers plan to remain independent for the foreseeable future. Executing this plan, however, has become far more complex than it was in prior years. The insurance landscape has changed dramatically in recent years, and the gap between internal and external valuations seems to be continually widening, making it even more challenging for agencies to perpetuate internally. However, the fundamental challenge remains: how can an agency successfully navigate the shifting market dynamics and reach its desired perpetuation destination?While each agency has unique needs that dictate various options, there are time-tested, proven principles for maintaining private ownership that still apply to agencies of all shapes and sizes.

In 2010, Reagan Consulting conducted The Private Ownership Study to better understand the best practices of agencies dedicated to remaining independent. In creating this Study , Reagan surveyed 900 firms, examining in detail 145 firms committed to private ownership. To successfully perpetuate in 2010, Reagan discovered that there were four pillars, or keys, to perpetuation that allowed firms to remain independent: (1) healthy operations, (2) reasonable sellers, (3) able buyers, and (4) an effective transfer mechanism.

When the Study was conducted, the economy was struggling following the Great Recession of 2008. Profit margins were down, organic growth was anemic, and there was a historically soft property & casualty market. Appraised agency valuations, used to set the values for internal share sales, were roughly 6.0x trailing pro forma EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization, or pre-tax cash flow). Now, only ten years later, internal appraised valuations have rocketed to almost 9.0x pro forma EBITDA, a 50% increase.

Enterprise Value as a Multiple of Pro Forma EBITDA

~50% Increase in 9 years

8.9x

8.6x

8.2x

7.1x

7.0x

6.9x

6.8x

6.5x

6.3x

6.1x

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: Reagan Value Index

This massive increase in agency valuations had a significant impact on the affordability of equity to would-be buyers. To gauge equity affordability, Reagan Consulting uses a metric called the Buyer Coverage Ratio (“BCR”). Under the assumption of a financ ed equity purchase (generally the case), the BCR is the percent of a buyer’s first annual payment

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