The IA system has been in a period of prolonged consolidation for the past 30 years without any signs of a real slowdown. According to the Agency Universe Study, the number of independent insurance agencies has declined by 12% since 1996, and barring a 10% increase in 2022 (a temporary COVID bump), the IA system had lost 18% of its agencies through 2020. We expect to see the loss of another 1,000 to 2,000 agencies when the next Agency Universe Study is published later this year.
“It was the best of times; it was the worst of times.”
Charles Dickens, A Tale of Two Cities
A major driving factor in the decrease in the overall number of agencies is the robust M&A activity we have experienced, particularly in the last 10 years. According to Optis Partners, since 2016, there have been 7,635 publicly reported M&A transactions in the IA system.
In this article we will attempt to answer the question of whether the M&A environment is good or bad for the IA system and your agency. In short, that answer largely depends on the position you occupy in your agency.
Best of Times
If you are a 58-year-old agency owner, you are in the modern-day IA gold rush. According to IA Valuations’ data, the average EBITDA valuation multiple is 8.5 (all combined revenue categories), and the revenue multiple in an external sale is 3x regardless of the profile of your agency. In our experience, we have seen low growth, paper file, heavily concentrated Personal Lines agencies without a perpetuation plan sell for the aforementioned multiples in this market. For now, that is the new marketplace floor, and if you are selling for anything less, you are not doing your homework and cheating yourself out of your hard-earned dollars.
In the past 8 years, the average insurance agency EBITDA valuation multiple has risen 42%. That means if you owned an agency in 2018 and maintained your book of business at stable levels, your agency is likely worth 42% more due in part to the insatiable demand for M&A in this market.
The best part: valuations continue to reach record level highs year-over-year (up 8.7% last year). Hence, it could not be a better time to own an independent insurance agency if you are in the later stages of your career, looking to sell your agency, and work for a few years before retirement.
Worst of Times
If you are an aspiring agency owner or an inexperienced acquirer in a privately held retail agency, the outlook is not as favorable. The cost to become an owner has never been higher.
There are no deals in this market. Sellers have countless options and are well aware of the value of their agency, so if you want to acquire their business, you are going to pay top dollar, whether perpetuating internally or acquiring externally.
In addition, due to the influx of Private Equity (PE)-backed buyers, the ability for privately held retail agencies to compete for acquisitions has become incredibly difficult. PE buyers are offering deals that include lucrative cash down payments, equity in the enterprise entity, generous salaries to stay, and employment for the whole staff. These offers are quite enticing and are even causing parents to reconsider their plans to perpetuate to their children in the agency.
So, is it good or bad? Well, two things can be true at once. For some, it is the best of times, for others, it is the worst of times. That is the state of the IA system at the moment. To talk about your unique situation, you can reach out at jeff@iavaluations.com or contact@iavaluations.com – our team is here to help guide your agency.
By: Jeff Smith, JD, CIC
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 400 valuations to independent insurance agencies across the U.S. Our advisors have 30+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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