I was recently interviewed for the Independent Agents Magazine for an upcoming article on perpetuation planning. I said something that I typically don’t say, which is that now (or at least within the next 18 months) is the optimum time to sell an agency. I believe that market values are as high as they will be for a decade and will crest within the next 18 months. Here’s why:
1) Revenues for most agencies have been trending up over the last few years. We perform dozens of agency valuations per year and observed the turning point in about 2012.
2) Buyer activity has increased dramatically over the last two years, likely tied to #1, and acquisition money from both lenders and private equity has poured into the market like a broken fire hydrant. The result has been an increase in transaction multiples of 15-20%.
3) Insurance rates are softening for many lines of business, which will likely reduce recent growth rates.
4) Interest rates have been held at historic lows for far too long by the federal government and will likely start to tick up, increasing buyers’ cost of capital.
5) M&A activity follows a 10 year cycle that historically starts to bust in the second half of the decade.
6) Competition, consumer buying behavior and profitability in some major lines of business, such as auto, are going to erode agency revenues over the next 5+ years.
Each item above alone is nothing to fear but the combination of more than one factor has a negative, multiplying effect on an agency owner’s equity. We saw some of these factors come into play during the last recession and had clients whose equity shrank 30% or more, which was the equivalent value of 2-3 x what they made per year. In other words, they worked 2-3 years more with no financial benefit in the end.
I’m not telling every agency owner to initiate their exit now; however, if you are within a few years of it, then this message is for you. Market values are as high as you will likely see.
As always, I suggest seeking the help of a professional M&A advisor to ensure that you’re getting the maximum value from the marketplace with the least amount of risk possible. Give us a call for a confidential discussion of current valuations: (321) 255-1309.