AGENCY PERPETUATION

Agency perpetuation expert Brian Burke offers insight into valuation trends and projects what’s to come in the world of agency deals. He also explains what a perpetuation-fitness assessment entails and who should undertake one in this first of a two-part series.

By Brian Burke, B. H. Burke & Co., Inc.

To introduce our thinking on the ever-important subject of agency perpetuation, we’ll begin with a look at what’s happening “out there” in the world of agency values and agency deals, and the implications of that for the subject at hand.

At our firm, we have been thinking for several years now that if agency owners are intending to sell their agency, or a significant part of it, either outside or as part of an internal perpetuation plan, they better act “now” because the recent well-documented run-up in values will not last forever. Financial things just don’t go up in straight lines, or even smooth curves.

Well, we are glad we didn’t say that out loud too often because the deals and the values just kept on comin’. Year after year.

But now we think you ought to listen. We do not have a crystal ball, and our ego is in check. We don’t know what’s going to happen. But here are some signs that the curve is bending flatter and is likely to bend some more soon.

One sign is actually more than a sign. It’s hard data. A couple of national agency buyers we have worked with are now offering lower EBITDA multiples than they did just a short time ago, all else being equal. They may stretch here and there, but only for special situations or agencies that are both a good fit and large. “Game changers,” they call them. For other prospects, their offering multiples (of EBITDA) are down on the order of 8 to 12%. We’re not saying that’s true of all buyers right now, but it is for a couple of prominent ones. And it’s an important data point.

Be assured, if you have a good book of business, a profitable operation, and the proven ability to grow, even modestly, your agency remains marketable, and for good value. And there are some new “accumulators” on the scene. But the trend lines are changing.

Another factor is new but considered real by most people who pay attention to things on the M&A front. That is the strong likelihood that taxes are going up in 2022 and maybe even in late 2021. There is talk of a doubling of capital-gains tax rates. Even if that kind of a bite does not happen, fear of it, a legitimate fear, will drive behavior. It might accelerate a couple years’ normal M&A activity into the rest of this year. Big implications.

Another is interest rates. With the amount of money our federal government is spending, borrowing, and creating (unprecedented and until recently, unfathomable), everything we have learned in economics says that this will lead to inflation and therefore to interest rate increases. Believers in Modern Monetary Theory say, “No, not necessarily this time; this time is different.” Who’s right? We don’t know. But we know this: We would not bet the farm that rates won’t go up. So we can’t say rates are going up, or when. But we can say that if/when they do, the demand for equity will go down. And private-business ownership, including insurance-agency ownership, is in the equity bucket. When demand goes down, so do prices. That much we do know.

If you intend to engage in a perpetuation transaction soon (the next year or two) or several years from now, or even if you are unsure about what you should do on that score, we recommend that you do a serious and thorough perpetuation-fitness assessment soon. The assessment should involve an objective look at three things: One, what you have in the way of the building blocks needed for a successful perpetuation plan (those building blocks being people, systems, attitude, and performance). Two, a few future-value scenarios for your agency. Precision is not the aim. You want to see the likely impact on value of some of the key developments in the economy and industry. And finally, cash-flow projections for at least a few different perpetuation-transactions. There are a lot of ways to structure these things. Whatever you end up doing, you should engage in a good workout soon on these subjects. Get comfortable with the trade-offs. Take some of the mystery out of it.

The independent insurance agency business is still a great business. It has a business model that, if managed well, is hard to beat and the envy of many business owners. So don’t listen to Chicken Little. The sky won’t be falling. But some of the things that affect your business are changing, and maybe by a lot.

Okay, now, let’s say you do the fitness assessment recommended above and that process injects some new energy into a perpetuation plan for your agency. And let’s be realistic and say that you still don’t have all the answers for what the plan should look like, but you have a revived sense of direction. What then should the agency’s priorities be, and yours in particular? Not generalities and old refrains, but solid, specific business priorities in light of 2021 realities.

If we had all the readers of this article gathered in a conference center (in a happy post-Covid world, without masks) and we were leading a seminar on this subject, we would have a mid-morning shift into four break-out sessions: One room for significant owners and managing partners; another for minority owners/perpetuators; another for producers and others aspiring to be owners and perpetuators; and a fourth for managers and other key people who, for whatever reason, do not aspire to be owners but are committed to the agency and love what they do.

The task in each break-out session would be for every person to come up with two lists – not laundry lists but short lists of not more than four or five things each. List one: From your perspective and in your long-term interest, what do you want the agency’s priorities to be for the next two years? List two: What should be your own personal, job-related business priorities in the next two years?

In next month’s follow-up article, we’ll tell you what we believe should be on the lists for people in all four break-out sessions. Until then….

Brian Burke is the founder and semi-retired chairman of B. H. Burke & Co., Inc. Learn more at BHBco.com.