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NOW is the Time to Sell Your Independent Insurance Agency

Selling an agency at the right time

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.

Posted by:  Michael Mensch, CBI, M&AMI and Managing Partner

About Michael Mensch

Michael is a managing partner and client advisor for Agency Brokerage Consultants, a national mergers and acquisitions firm serving independent insurance brokerages.

One comment on “NOW is the Time to Sell Your Independent Insurance Agency

  1. Michael Mensch
    June 10, 2016

    A year ago I suggested that agency valuations would crest in the next 18 months. Here’s the update as of June 2016:

    1. Agency valuations have plateaued – as have revenues for most agencies. Granted there wasn’t much room on the ceiling a year ago but we’ve noticed the peak and other firms have reported likewise (see link 1). And while PE buyers suggest valuations will hold steady, that assumes the general economic environment does not change.

    2. Serial buyers have become sellers. This is probably one of the strongest indicators. We’ve had conversations with a number that either are selling or have been seriously contemplating it given the market conditions.

    3. Interest rates will tick up in 2016. Despite the weak jobs report, the Fed is still holding out that a rate increase is needed (see link 2).

    4. The global economy is getting shaky, with certain signs akin to 2008 like the rush on precious metals and precious metal mining stocks (see link 3). You can also Google “George Soros and gold” and read about how he is planning for a crash.

    5. For the last 200 years, more than 50% of US presidential elections have coincided with a recession either in the year of the election or the year following it. More than 65% of recessions in the last century have coincided with presidential elections and the number increases when you eliminate years where there was no change in the White House. Not surprisingly, recessions tend to follow an 8-10 year cycle. Being 8 years out from the onset of the last one, we have a pretty good reason to expect another one coming. (see link 4)

    6. And not quite as important but competition is heating up from non-traditional sources. Google aside, Fintech has been a new buzz word in the insurance industry with billions invested in new start-up firms looking to disrupt the industry (see link 5).

    To be clear, I’m not a doom and gloom kind of person. In any business, the owner should be looking down the road to see what lies ahead. Even if valuations drop and we enter a new recession, the insurance industry is still one of the best to be in if you’re in it for the long haul. If you’re not though, now would be a good time to consider exiting.

    For some additional thoughts on determining if now is the right time, check out my associate Chris McAtee’s article in The Bridge Publication (page 11).


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