WHY SHOULD YOU CARE ABOUT YOUR AGENCY’S VALUE?

Understanding its value leads to better-informed actions to running the business

If you think you know the value

of your firm because you received an

offer from a buyer, or you heard what a friend’s

agency sold for, you are misinformed.

By James Graham, CVA

It is surprising how many insurance agency owners do not know the value of their firm—or the factors that affect the value of their firm. For the vast majority of owners their agency is likely the most valuable asset they own. A relatively small improvement in value can have a bigger impact on an owner’s wealth—more than any other action you could take. If owners truly understand the value of their agency, and the factors that contribute to its value, actions related to running the business can be better informed.

As an owner, you should internalize that your agency is not a commodity. While there are market trends and multiple averages that broadly apply, no two agencies are the same, and therefore value isn’t reviewed equally. MarshBerry data shows that the average spread in value in offers on announced deals was approximately 46% in 2022. This data suggests unless one has access to all the facts, a potential seller could easily be taken advantage of in exclusive negotiations. This data also reenforces the fact that valuation is not objective and uniform across all agencies.

As the old saying goes, a failure to plan is a plan to fail. Agency owners who don’t plan and act with knowledge are likely not in control of their own destiny. It is unfortunate how many owners operate their firm with no long-term and/or clear strategy around driving the equity value of their firm. Often owners make statements about how they will never sell. However, you can’t take your agency to the grave with you. Some have life insurance plans in place in lieu of a perpetuation or succession plan. Unfortunately, this is likely to materially reduce the actual value of the firm.

Another key reason to have awareness of the value of your agency is to help attract and retain talent. As the war on talent gets more aggressive, firms that have a strong equity story continue to outperform their peers. The first step in executing on a strategy that uses equity to attract and retain top talent is to know its value and have a strategy to increase it. It is important to use this information to effectively communicate to potential future partners why they should work hard and take risks to purchase their employers’ equity.

If you think you know the value of your firm because you received an offer from a buyer, or you heard what a friend’s agency sold for, you are misinformed. Acting on this misinformation can cost an owner millions of dollars when it comes time to transact either internally or externally. In contrast, agency owners who know and understand their equity value are more likely to have a plan to maximize the value of their asset and are more likely to attract other leaders to help them grow their firm. n

The author

James Graham joined MarshBerry in 2015 and is a director on MarshBerry’s Financial Advisory team in its Dana Point, California, office. His expertise includes merger and acquisition advisory, capital raising, business valuation, perpetuation and succession planning, and strategic planning. James provides his clients with customized financial & capital strategies to help them accomplish their goals. He also is a facilitator for MarshBerry’s Connect Network and actively publishes articles relevant to the insurance distribution marketplace.

Prior to joining MarshBerry, James was a senior consultant with Deloitte Consulting, LLP.

James currently maintains the FINRA Securities Industry Essentials® (SIE®) Exam in addition to the Series 62, 79 and 63 FINRA Registrations through MarshBerry Capital, LLC, the affiliated FINRA-registered broker-dealer of Marsh, Berry & Co., LLC. He earned a Bachelor of Science in Finance from Azusa Pacific University and a Master’s in Business Administration (MBA) from George Mason University. He is also a Certified Valuation Analyst (CVA). Contact him at James.Graham@MarshBerry.com or (949) 272-0351.

SIDBAR:

M&A MARKET UPDATE

Through June 30, 2023, there have been 271 announced merger and acquisition (M&A) transactions in the United States. Private capital-backed buyers accounted for 192 of the 271 transactions (70.8%) through June, which is consistent with the proportion of announced transactions over the last five years. Total deals by these buyers increased at a Compound Annual Growth Rate (CAGR) of 8.4% from 2018 to 2022, with a marked increase after the onset of the pandemic.

Deals involving specialty distributors as targets accounted for 67 transactions (or 25%) of the 271 deals in 2023—a six percentage point increase in transaction share over 2022. Specialty firm deals have increased by a CAGR of 22% from 2018 through 2022, a trend that is anticipated to continue as traditional retail brokers expand into the wholesale and delegated authority space.

Independent agencies accounted for 14.4% of the total year-to-date (YTD) transactions—down from 17.2% in 2022. High valuations, coupled with limited availability of capital, are likely contributing to this decline in overall share of transactions.

Deal activity from the marketplace’s most active acquirers remains strong in 2023. Ten buyers have accounted for 49.1% of all announced transactions, while the top four (BroadStreet Partners, Inc.; Hub International Limited; Inszone; and Risk Strategies Company) account for 28.0% of the 271 total transactions.

Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., LLC., 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 (440) 354-3230).

Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. Statistics are preliminary and may change in future publications.

Please feel free to send any announcements to M&A@MarshBerry.com. Source: S&P Global Market Intelligence and other publicly available sources.