Is it a Buyer’s Market After All?
Since 2015, a startling number of firms have switched hands without a Merger & Acquisition (“M&A”) adviser being involved in the transaction. The number of transactions without sell side representation increased from 71% in 2015 to 78% year-to-date May 2019. But how does that compare to other sectors?
We found that insurance underwriters appear to utilize sell-side advisers much more frequently than insurance brokers do. But what is the reason behind the consistently high number of deals without sell-side representation in the insurance brokerage industry? Our experience tells us that it has to do with the modus operandi of many buyers.
In 2018, 343 (59.4%) firms were acquired by Private Equity (PE)-backed buyers. We know that although the business models of the various platforms may differ, they all have a strong focus on growth through acquisitions to take advantage of multiple arbitrage opportunities prevalent in the insurance brokerage market. So why are PE-backed agencies interested in allocating significant resources to generate buy side opportunities?
We believe it has to do with the potentially lower price that buyers are able to pay when an agency is working exclusively with them, therefore bypassing competition from the crowded field of well-capitalized buyers. Many buyers prefer having exclusive conversations with agencies, knowing full well they can pay less. But what drives sellers to entertain conversations or even enter into exclusive negotiations without asking for help from an experienced external adviser who can help obtain multiple bids and negotiate the best deal on their behalf?
Our Top 3 Reasons Why Sellers Refuse Outside Help
1. “I believe that I am getting paid a fair multiple that is in line with market.”
Even if the multiple appears to be in line with market, the real question is: “What amount of operating earnings is applied to the multiple?” Said another way, what is the pro forma EBITDA (“Earnings before Interests, Taxes, Depreciation and Amortization”) after adjusting for all non-recurring expenses and one-time items? Perhaps not upfront, but at some point, many buyers will likely inform you about the expenses that need to be factored into the pro forma income statement, such as additional overhead or benefits, to reflect differences in the buyer’s cost structure – all of which lower your value. But how about expense savings that can improve your value? Despite what they might tell you, do you really think a buyer is motivated to help you identify and realize the hidden value of your firm?
2. “I want to save the adviser’s fee.”
Thinking in multiples might change your perspective! Divide the sell-side adviser’s fee by the EBITDA multiple and you will realize that most advisors only need to increase pro forma EBITDA by a fraction of their fee to be worth the money. But it goes far beyond that.
At MarshBerry, we spend a lot of time analyzing the business at the beginning of every sell-side engagement— including expenses, compensation structures and other operational considerations. For most agencies, the adjustments resulting from such an analysis are usually quite significant. On average, the pro forma EBITDA of clients represented by MarshBerry in 2018 was 17 percentage points higher than their reported figures. In other words, partnering with MarshBerry’s M&A advisory services helped create a 17 percentage point increase in EBITDA, which can then be multiplied by the earnings multiple paid by a buyer to identify the value we bring to transactions.
But we believe that the value an adviser can add to the process goes even further. An adviser worth the money will be with you at every step of the transaction, allowing you to focus more of your time and attention on running your business. In addition, with the involvement of an adviser you can have multiple bids to choose from. If you discover something about a potential buyer that makes a transaction less desirable, you will have the option to pivot seamlessly to another buyer and continue the process.
3. “It's about the right fit / I want to start the relationship right.”
There is no doubt that the fit of a potential buyer plays an important role in the selection process. In fact, it is often the #1 requirement mentioned by our clients. Rather than going exclusively with a single buyer from the start, wouldn’t it be better to have multiple options to choose from? Let each buyer put their best foot forward and explain to you why you should be selling to them. What is the cultural fit? What is their value proposition and how does it compare to that of others?
Think of a sell-side adviser as the buffer between you and the potential acquirer. Involving a knowledgeable and proven adviser in the process completely changes the dynamic of negotiations. By having an adviser advocating for you at every step of the process, you can maintain a positive relationship with your future partner. Our goal is to create a win-win for our clients.
A lifetime of dedication, commitment, courage and internal investment has brought you and your agency to where you are today. If a sale is part of your strategy, it is only reasonable that a buyer should pay a fair price for your firm. Whether it is the end of a very successful chapter or the start of a new journey, you should strongly consider the benefits of having an adviser by your side when selling your company.
Sources: S&P; MarshBerry’s proprietary database