Insurance agencies know this is a hot time for acquisitions and mergers as they watch peer after peer being purchased or folded into a larger operation.

The transactions are in part being driven by an infusion of private equity into the independent agency marketplace throughout the country, which has been driving up agency valuations. And while M&A activity has subsided in the last year, private equity investors are still active.

The feeding frenzy has made many agents almost giddy about the prospect of selling their agency, providing them with the money they need to retire or continue working for the agency under the new owners. And while many agents are getting noticed and receiving up to three times their agency revenue, not all agencies will receive the same treatment.

Here’s a look at what private equity buyers are seeking in today’s market.

Size and location matter

Not every agency is going to attract the interest of multiple private equity investors.

According to market watchers, the ones that are receiving offers from more than one investor usually have the following attributes:

  • More than $1 million a year in revenue.
  • Logging double-digit growth.
  • A profit margin of 35% in terms of earnings before interest, taxes, depreciation and amortization.
  • 70% of the agency’s books is commercial lines p/c insurance.
  • A crew of productive young agents on staff.
  • Is located near a growing metropolitan area.

In other words, the agencies that investors are approaching are above average. According to MarshBerry, the average independent agency in the U.S.:

  • Generates $600,000 a year in revenue.
  • Has flat, or single-digit growth.
  • Has a book that is split 50% commercial lines and 50% personal lines.
  • Has a 15% to 25% EBITDA.
  • Has producers that skew older.

Don’t expect full payment up-front

Some agency owners expect that if they find a buyer, shortly after they sign on the dotted line the buyer will be transferring the entire sum to them.

That’s not how it works generally, unless you are selling your agency at a deep discount.

If you are selling to a private equity-owned brokerage, the deal will more likely be structured in a manner that resembles the following:

  • A significant up-front lump sum payment.
  • A percentage of equity in the buying private equity brokerages.
  • A three-year earnout period.
  • Salary and commission to the selling owner to continue working as an employee of the buying firm.

Don’t expect to sail off into the sunset … yet

One of the main reasons private equity investors would be acquiring your agency is your track record in running a successful and growing agency. They are buying your expertise and will often require you to continue working and growing the agency after it’s been purchased.

Besides drawing a salary, they will often give you shares in the parent company to ensure loyalty and dedication to continue the growth trajectory.

Today’s private equity firms are more interested in purchasing thriving operations that will contribute to the firm’s overall growth.

It’s quite likely that if you can’t commit to staying with the agency for a set number of years, the private equity firm may decline to make an offer.

Be prepared to stay on for a number of years after the acquisition. Many sellers enjoy the additional freedom they have after selling, as they won’t be saddled with many of the administrative, HR and management responsibilities they had to deal with when they were running their own agency.

The takeaway

If you are considering putting your agency up for sale, you should go into the process with open eyes and understand what your operation is worth. Expect to stay on for a number of years and plan for a package that includes a partial up-front payment, combined with equity ownership in the purchasing entity and more payments in the years to come.

If you are serious, you can get an early start by gathering all of your financial, carrier production and other data related to your agency’s performance.

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