Brokerage and agency purchases were in the lead in 2018 in terms of transaction volume, with the bulk of the activity coming from various series makers who bought regional middlemen. M & A consultancy OPTIS Partners have recently reported that in 2018, 626 announced brokerage mergers and acquisitions took place in the US and Canada and many more unannounced transactions. Both PwC and OPTIS have reported that private equity and hybrid buyers accounted for most of the 2018 current transactions, with top buyers Acrisure, AssuredPartners, Arthur J. Gallagher & Co., Alera Group, NFP Corp., Broadstreet Partners and Hub International.
So why are insurance brokers now so attractive to buyers? First, it offers companies the chance to scale up their national footprint. Independent brokers generally have a strong local position among loyal customers. Acquirers have come to realize that these local relationships are vital if they want to buy and build, explained Greg Peterson, partner, leader in financial services in the United States, PwC.
The active M & A environment in North America is both a challenge and an opportunity for independent brokers. By working together with larger strategic companies, smaller brokers can gain access to broader distribution channels and product offers. On the other hand, the challenges tend to come in the form of complex deal structures, poorly attuned cultures and integration.
"These deals can be structured in many different ways," says Gregory McGahan, partner of asset and wealth management deals at PwC. "Acquirers can take a direct takeover or they can make a contract for which they block the brokerage for a number of years (the longer the better)." The question is, what happens at the end of the contract period? "If the brokerage does a great job and a lot of value during the five-year contract, what happens to the value created? Should the acquirer renegotiate and pay a higher price to extend that contract? Even if acquirers choose the contract method, they run the risk that a competitor step in, bring a different product range on the table and encourage the broker to move his business in a different direction. "
Cultural challenges are often the most important roadblocks for every acquisition of brokers, according to McGahan. It can be difficult for owners of their own or family businesses to suddenly bend their knees for business dictators. In the context of increased consolidation, the best thing brokers can do is be prepared for all eventualities and has a clear idea of their business value and culture.
"Often, when an acquirer comes knocking, an interviewee is simply not ready," Peterson said. "Potential sellers have to be prepared for the knock on the door, regardless of who it comes from, and they have to do that preparation and due diligence before they put themselves in the game – if there are things they need to repair, address, or explain, they do that, and everything that is discovered in the due diligence process actually creates value and leaks that from the table on the vendor's table to the buyer. "
Simply put, any broker who is considering selling in the broader consolidation trend should perform normal dress rehearsals because the bestsellers are the brokers prepared for the sale, McGahan said.
"You are either the hunter or the hunted – and you can be strategic in both cases," he said Insurance business. "Brokers can gather basic things such as a series of financial statements, an analysis of their customer base and the retention of those customers, and an analysis of the profitability of their company." Having all of that financial information is crucial, because that is where the deal with it, someone comes in and does a due diligence on the brokerage.
"Pretend to buy your own company, what questions would you ask? Do you have the necessary information available so that you can tell the buyer the right story? The last thing you want to do is to get you in the right place diligence process, because that is the possibility for the buyer to actually work against prices and value, so the best thing to do is spend some time preparing yourself for all eventualities. "