Today's Viewpoint: A MarshBerry Publication

Perpetuating or Selling Your Insurance Brokerage – The Choice is Yours

Give your brokerage firm the power to choose between selling or perpetuating by implementing a plan that helps to drive profit and productivity. With this guide, you’ll learn key strategies that will help you operate your firm as if you’re planning on selling your insurance brokerage. Explore these tips and discover processes that will help you build a stronger company today.

During the lifecycle of an insurance brokerage firm, owners eventually ask: What’s next? Who will buy the firm? Should I sell the company internally or externally?

Perhaps a better question to ask is: Do you really have a choice? Have you positioned the firm financially, culturally, and organizationally to maximize shareholder value and carry on the legacy of the firm?

Typically, the answer is no. Owners are often left with little choice in the matter of selling the firm internally or to an outside party because they are not prepared. Come selling time, many firms often face a significant difference between their internal value and the value that an external strategic buyer would pay (the valuation gap). Owners may run their firms like a “lifestyle business” for many years, perhaps neglecting to make tough staffing and compensation decisions, or overlooking expenses that could be tightened to improve profitability. Sure, business has been good—maybe even great—but the firm itself is not operating at high enough growth or profit to maximize its value. As a result, there’s a valuation gap that prevents many firms from perpetuating. They simply can’t afford it or are not willing to take the risk.

Running an Insurance Brokerage Successfully

Valuations have nearly doubled since 2010 and 2022 is seeing some record pricing for sellers. Pricing for internal stock trading hasn’t increased at nearly the same pace as the external market, leading to a large valuation gap. The pace of consolidation of the U.S. independent brokerage market does not appear to be slowing. Approximately three out of four firms are likely to sell externally. But if you operate your firm as a business—if you run it like you are going to sell it— then maybe you won’t have to contribute to the consolidation trend. The goal is to prepare and execute change so that you have attractive alternatives, and to close the valuation gap by creating a profitable, productive firm with a strategic plan in place.

Bridging the Gap

Operate your brokerage firm as if it was publicly held—run it like you are planning on selling your insurance brokerage. If you work to push your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) to a 28%-32% margin, then you hopefully won’t have to sell. You may choose to sell, but you will not be forced into the decision.

As you look to execute a plan to preserve the value of  your firm – there are three key areas to focus on:

1. Staffing and Compensation. As the largest expense in an insurance firm, it’s important to evaluate and monitor producer performance and establish a compensation structure that aligns with market comparables. Are you underpaying or overpaying producers? Are the people in your organization doing the jobs they are paid to do? How are you holding them accountable? Have you kicked the can down the road on underperforming employees?

2. Expenses. Many firms run lifestyle expenses—like country club memberships—through the business without thinking about the impact on profit. Because a firm is independent, its owner might run non-business-essential expenses through the operation. Take a good, hard look at the current expense structure and determine potential cuts.

3. Reinvestments. Are you reinvesting the firm’s profit to acquire more resources to boost production? Are you hiring talented producers and giving them performance guidelines to meet? Are you putting support in place for producers to meet goals, such as hiring claims professionals or loss control resources, or bringing outsourced solutions or new technologies? Keep in mind: if the profit margin is only 10%, there is little extra to reinvest in the firm, but with a better margin those profits could be reinvested to help drive more growth.

Execute the Plan

It takes courage to change and to implement best practices that may force employees to take a closer look at their own performance to see if they’re measuring up to new standards.

You’re not alone with developing a strategic plan to position your company for improved profitability—and the flexibility to eventually sell or perpetuate. But ultimately, the firm’s leaders—you and your team—are responsible for establishing a productive, profitable culture.

Sure, there may be pushback from producers and other employees who have been comfortable in their positions for some time. Some may not want to be a part of this new culture, and that’s perfectly fine. Talented, high-performing producers should appreciate and embrace a strategic plan that celebrates true producers. After all, they are the ones who are driving the company’s profit.

A strong leader will deliver the message that the process is designed to build a stronger company, one with greater value and potential ownership opportunities for its employees.

It’s all about choice. What’s yours?

If you have questions about Today’s ViewPoint, or would like to learn more about how MarshBerry can help your firm develop perpetuation plans, please email or call Eric Hallinan, Director, at 949.234.9652.

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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.