The pace of merger & acquisition (M&A) activity in the insurance brokerage sector continues to be brisk following strong activity into the second half of 2021. Potential federal capital gains tax increase and high levels of deployable capital are driving many deals. The industry is set to have the most active year of consolidation on record during 2021. Total announced U.S. transactions at seven months into 2021 are up by 10% vs. the same period in 2020.
A number of large insurance brokers noted recently that M&A demand is continuing into third quarter 2021. Although the environment is highly favorable for insurance brokerages to sell, some owners are still not utilizing an advisor. MarshBerry has noted before that opting to not select an advisor could be detrimental to your firm financially and culturally. Some sellers may even receive pressure from potential buyers to go it alone.
Reading the tea leaves
If you are in a deal discussion, it’s possible that the buyer will try to convince you not to hire an advisor. Statements like “trust me, we will pay market value, there is no reason to get a broker involved” are red flags. However, many selling firms believe the “deal is good enough” and don’t want to risk the buyer walking away given that some buyers threaten to do so if an advisor is hired. But sellers should understand that there are over 50 well-capitalized buyers in the marketplace currently. Any buyer who threatens to walk away is likely bluffing. If they are not bluffing, they cannot afford to buy another “Blender” and need more “Blendees” (you) to make the math work.
The reason the “don’t hire an advisor” phenomenon is prevalent is that deals that close with an advisor close at premium valuation multiples. Sellers with an advisor are the “Blenders” that are blending up the average multiple paid by buyers. These multiples often flirt with the multiple of the billion+ dollar broker buyer itself. To make the math work, many buyers target Blendees.
Blendees are unrepresented firms that sell for a discount to bring down the average (or blended) multiple paid over the entire lot of acquired firms. On investor calls, and in the closed-door meetings of buyers, a constant question is “what is your blended acquisition multiple?” No wonder so many buyers will put their arm around you and try to convince you not to hire an advisor or else “they will walk away.” If they didn’t corral a herd of Blendees per year, they couldn’t afford to pay leading prices for the best firms. The Blendees pay for the premium valuations passed on to the well-represented Blenders. At the end of the day, your company is probably your largest asset and a lifetime of work. If a buyer does not want you to have proper representation, you now know why.
The good news is that there are a number of high-quality buyers that actually encourage better firms to hire an advisor given an overriding priority to have the best possible outcome defined as “fairness and alignment with leadership before and after close.” These firms don’t blend down their average multiple by targeting unrepresented Blendees, they blend down their average multiple by pursuing multiple tuck-in acquisitions, or smaller deals, that roll into “your platform.” These buyers make the math work and willingly pay market value by blending down their average acquisition multiple by closing multiple deals that don’t deserve a size premium. The big deals are paid for by closing many little deals versus using fear tactics to take advantage of uninformed Blendees. And by the way, all the buyers hire advisors when they sell, raise equity or debt capital. And they are experts at deals.
As an advisor, MarshBerry has assisted many clients in achieving not just higher payouts in the sale of their companies – but overall better deal terms. Here are two recent cases where we helped improve the outcomes of M&A deals.
- In 2021, MarshBerry worked with a Central-U.S.-based employee benefits firm that already had an offer from a buyer in the marketplace. While the offer was competitive, MarshBerry increased the upfront purchase price by 40% and substantially enhanced the earnout structure from the Letter of Intent (LOI) that the seller originally intended to sign.
- In 2021, MarshBerry advised a multi-line broker based in the Midwest on a sale after the company’s initial transaction failed. Originally, the firm entered into an exclusive LOI without representation. After engaging with MarshBerry as an advisor that assisted in closing on a new sale, the client’s upfront proceeds increased by over 40% compared to the original offer.
- MarshBerry’s proprietary process allows us to understand the ideal partner for each client which ensures that the priorities of the client are met before and after the sale.
- Most importantly, the process of understanding the needs of a client and what is most important to their organization helps them find a partner that is a perfect cultural fit.
Beyond ensuring that you find the right buyer for your company, a high-quality advisor can help maximize your proceeds from a sale. Partnering with a top advisor can not only help find the best buyer, but also potentially boost your sale price substantially. But if you don’t hire MarshBerry, hire a reputable advisor that will help you navigate one of the most important business decisions you will ever make. You will be much better off having an advisor in your corner that knows the industry than trying to go it alone.
If you have questions about Today’s ViewPoint, or about your options in today’s marketplace, please email or call John Wepler, Chairman and Chief Executive Officer at 440.392.6572.
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The above examples are for illustrative purposes only. Individual results may vary.
MarshBerry continues to be the #1 sell side advisor in the industry (as ranked by S&P Global). If you’re considering selling your firm, we are the best choice to help you through the complicated process. If you don’t hire MarshBerry, hire a reputable advisor that can help you navigate one of the most important business decisions you will ever make. You will be much better off having an advisor in your corner that knows the industry than trying to do this on your own.