Our recent blog posts have covered the private equity boom in insurance brokerages, however, the reality is that the vast preponderance of insurance brokerages (probably over 95%) have revenues under $5 million annually. While these are often thriving businesses, they are nearly always too small for direct investment by a private equity firm. If you are the owner of an insurance brokerage like this, you may be asking yourself why any of this is relevant to you. How can you take advantage of the dramatic upsurge of private equity investment in the insurance brokerage?
“The main reason for an agency owner to jump on the private equity bandwagon is to reposition the agency for additional growth and value creation. It is not only to “sell”. Simply stated, being part of a private equity vehicle, whether your firm is the acquisition vehicle or part of a larger acquisition vehicle, can reposition the agency to grow far faster than would be the case staying independent.”
Realities and Misconceptions
Private equity sponsored brokerages are growth vehicles and as a result, they are not simply looking for businesses to acquire and integrate. Often, they are looking for partners who want to reposition their businesses to grow faster. They understand that agency owners who are looking to sell want to be paid the full cash value upfront. They also want to create incentives to encourage the agency owner to stay and accelerate the growth trajectory of the business. They structure each transaction to accomplish this end.
Business owners considering the potential sale of their business operate under a number of misconceptions about the sale process and result. Here is the reality:
The transaction consideration is typically paid 100% upfront – unlike transactions of years gone by, excluding extenuating circumstances, private equity sponsored brokerages do not pay part of the transaction consideration as a typical earnout. Rather, they pay 100% of the purchase price upfront and pay bonuses for the growth of the business for a period of time following the close of the transaction.
You become a partner in the new entity – unlike transactions of previous years, private equity sponsored brokerages now understand that successful transactions are all about the people. An insurance brokerage without its key people is like a melting ice cube – it slowly slips away. For that reason, the transactions are structured to keep the business owner “in the game”. They make you a partner in the business by providing you with a part of the consideration in equity--typically the same equity that is owned by senior management and by the private equity firm. They also provide growth bonuses as part of the consideration for a number of years following the transaction.
The focus is growth and not integration - Your business can potentially grow by receiving higher commissions and contingencies, as well as by gaining access to additional markets. Concurrently, you are able to free up time to focus on growing the business rather than running the business. Also, because you and all of your new colleagues in the acquirer are partners, you have the same incentive to grow the business as a whole. Throughout the process, your business will typically keep its own name, at least for several years after the transaction, and, depending on the acquisition partner and your situation, your business also typically operates fairly independently.
You are not selling out, you are repositioning your business – As your strategic advisor, we always encourage our clients to consider each option for repositioning their business to create additional value. For some agencies, the best option is raising private equity capital, for others a sale, and for still others internal perpetuation. In the most successful sales, you are not simply selling the business; you are repositioning it to create more value, to achieve your personal objectives, and create greater satisfaction. In fact, many of our clients learn that they did not sell out, they in fact traded up.
Stay tuned for the next blog post, which will discuss the anatomy of a transaction – “How Transactions Are Structured.” And, of course, feel free to call us at 516.967.1958 or reach out today if we can be of assistance or you would like a consultation.
Among the brokerage community, Sica | Fletcher is well known as the leading strategic advisory firm in the U.S. that specializes in the insurance brokerage space and related industries that compliment it. In 2018, we lead the country with 79 transactions completed for insurance agents and brokers, and in 2017, we led the country with 62 closed transactions. We are also the leading advisor to the private equity firms that are most interested in investing in insurance brokerages and in the private equity sponsored agencies that have been created in recent years.
The firm was founded in 2014 by Michael Fletcher and Al Sica, two of the industry's leading insurance M&A advisors who have closed over $6 billion in insurance agency and brokerage transactions since 2014.