To put it mildly, 2020 has been a difficult year. The U.S. has experienced a once-in-a-century pandemic, a severe economic recession, civil unrest, and a bitterly contested election. Even still, if you’re an independent insurance agency owner thinking about selling the agency, experts agree that this is a good time to do it.
For one thing, the pace of mergers and acquisitions activity has weathered the changes. OPTIS Partners, a brokerage that represents agency sellers, recently reported that M&A activity for 2020 year to date is down 7%. A 25% plunge in transactions in the second quarter was partly offset by strong activity in the first and third quarters. The report predicted a continuation of the third quarter pace, with some owners selling this year out of fear of a possible capital gains tax hike following the election.
Selling prices have held steady and even increased slightly, according to consulting firm MarshBerry. Dan Menzer, an M&A advisor with OPTIS Partners and a Certified Public Accountant, says that buyers are showing some caution, however: “We have seen some where buyers are presenting offers with stated EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiples, but ‘holding back’ some for 12 months if the seller is able to deliver at least a flat revenue or EBITDA level.”
The quality of the agencies for sale is little changed from the past few years. “In 2018 & 19 there were junky agencies for sale and good ones, and the same holds true now,” says Jon Persky, CPA, CIC, PHR of Optimum Performance Solutions, an agency brokerage. Other factors are driving owners to sell, including their advancing ages. “COVID has perhaps accelerated the timeframe of aging out baby boomers.”
Agencies with a personal lines focus have been busier this year despite the economic downturn, boosting their profits and making them more attractive to buyers. Persky notes that, because so many people have been working from home, agencies are finding it easier to contact their customers and build relationships. The agencies that may have a more difficult time in the market are those that have focused on hospitality businesses – restaurants and hotels – and concert venues. These agencies, Menzer says, “have likely not felt the full effect of shutdowns yet, and it may take another 6-9 months for this to work its way through the renewal cycle.”
The current low interest rate environment is also a boon for agency sales: “I have preached in the past that low interest rates equal higher valuations,” says Marc Greene of General Insurance Brokerage, “and I believe that to be the same in the current environment.”
Private equity firms remain active buyers. Persky says a month doesn’t go buy where he doesn’t hear from a PE firm wanting his advice. They like the industry for its low capitalization, high customer retention rate and predictable earnings, Menzer says. And purchase loans are still available; Greene says lenders are eager to lend for good acquisitions. Persky sees a little more caution from lenders; they are “doing a deeper dive into the makeup of the client base.”
This remains a good time to sell, says Greene: “I don’t really see that changing anytime soon.” Persky advises agencies to sell now if their time horizon is short because “it all comes down to taxes.” If Congress raises tax rates, agencies will need increased revenues to make the same profits. The important thing for sellers, Menzer says, is to find a partner who will give them professional guidance on the sales process. Well-prepared agencies who get expert help can expect to command attractive offers.