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As noted by many in the agent/broker M&A world, 2017 was the most acquisitive year on record. Reported transactions were up 20% for the first three quarters of the year over the same period of the prior two years, both of which were considered record-breaking, with a total of 563 transactions being completed. The top five acquirers alone completed 226 deals by the end of September, those being Acrisure (90), Hub International (50), Alera Group (29), Arthur J. Gallagher (29) and BroadStreet Partners (28), and the next five acquirers completed another 70 deals, led by Seeman Holtz Property & Casualty (18). With our relatively small staff, we were involved in 35 closed transactions and handled about 100 valuations for clients in 2017. Needless to say, it was a busy year for everyone.
Valuations were high in 2017 due to a strong demand and robust capital market but only increased moderately over 2016 due to diminishing returns from the already historically high multiples. Every year of the last decade has seen the emergence of new, well-funded acquirers. The compounding effect is that agency sellers not only benefit from higher valuations, but also a variety of buyers to pick from offering varying transaction structures to meet the agency owner’s personal goals.
Whereas the vast majority of agency owners in the past desired to sell as part of their short-term exit strategy, many are seeking out strategic partnerships to help them grow their businesses over the long run. I’ve had an increasing number of conversations with P&C and benefits agency owners about their growth struggles related to a lack of markets, internal talent, capital and tools. I believe this group will become a growing segment of sellers over the next five years. If that is you, keep in mind that, much like in a marriage, who you pick as that partner could make or break whether or not you hit your goals.
There are two key factors effecting the market this year:
1) Trump Tax Plan – We enter 2018 on the heels of a new tax plan that includes savings for most Americans. Buried in the plan is a cap on corporate interest deductions (30% of EBITDA) that will affect the more highly-leveraged buyers. In most cases, the loss of deductions will be offset by the lower tax rates so I don’t believe this provision of the bill will have a negative effect on the market. There is simply too much cheap money sitting on the sidelines with willing buyers looking to spend it. Furthermore, a lower tax rate will leave buyers with more cash to spend and increase their after tax ROI from an acquisition.
2) SBA Loan Changes – As of January 1st, the SBA modified the guidelines for 7(a) acquisition loans. The most significant change was a decrease in the required buyer/seller equity participation. Prior, the combination of buyer and seller participation was 25% of the purchase price. Now, the requirement is only 10% and the buyer is only required to put down 5% with the other 5% having to go to a seller note fully deferred for the term of the SBA loan. Basically, the government is taking on more risk by way of its guaranty to the lender (welcome back 2005!). I foresee this change increasing valuations for small to mid-sized agencies (SBA loans are capped at $5M), as it will make the average buyer more competitive in the marketplace against public and private equity-backed groups and help facilitate more internal agency sales.
In short, the combination of lower taxes and cheap money will perpetuate the historically high M&A activity and valuation multiples through 2018. If you are interested in finding out what your agency is worth in today’s market, give me a call.
Happy New Year!
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