“All the good agencies are gone!”
That is a quote from an acquisition-minded agent who was frustrated by his inability to locate an agency acquisition candidate who didn’t have major problems that needed solutions.
And, in a way, he was right. Since 1985 thousands of agencies have been sold, clustered, merged, or associated in ways that make them unavailable in the open market today. By some measures the independent agency network has shrunk by between one-third and one-half in the last twenty years.
ALL THE LOW-HANGING FRUIT HAVE BEEN PICKED!
Before the mid-1980’s most agencies internally perpetuated themselves from one generation of owners to another. One generation would make a good living selling and servicing insurance for their neighbors, then would pass on the business to their children or staff members who would also make a living the same way. The residual value of the business became the former owner’s “retirement plan”, an annuity that continued to supplement other asset contributions to maintain his lifestyle through retirement.
When we encountered family perpetuation plans, it appeared that many included funding the retired owners for the rest of their lives. Agency Consulting Group, Inc. has re-instituted internal perpetuation plans that are funded over prolonged periods of time to permit familial and closely related internal perpetuation to again guarantee funding for life for retiring owners. Call us for more information.
The key to the stability of agency acquisitions and perpetuation was the adequate compensation rates offered by carriers that permitted growth within the agency funded by growing revenue.
In the 1990’s and beyond, the insurance companies began to tighten the reins. Contingency contracts, growth bonuses and, eventually, commission rates, themselves, began to diminish in a perfect storm that included a ‘never-ending’ soft market. Both remuneration and insurance premiums were diminishing simultaneously.
Agencies found that their desire to internally perpetuate and continue payments to the old owners was less likely when costs continued to increase while revenues declined. Simultaneously, the same carriers who were cutting commission, contingency and insurance rates were demanding growth and threatening termination for smaller agents, even those with historically low loss ratios.
These actions also began the trend to acquire and combine businesses for the economies of scale that afforded itself as the result of the combination. Less locations, single administrative staffs, and enhanced productivity resulting in fewer staff needs made the acquisition of agencies, small and large, more attractive (and more valuable) every year. Those acquisitions permitted consolidation of markets that, while not profiting the agency’s growth need, satisfied the primary carrier’s growth need with tried and tested agency clients instead of with one-at-a-time natural growth through individual sales.
Agencies as large as the major brokers in the U.S. and as small as the one agent, four employee agency found themselves looking for other agencies to buy to supplement income and offset costs for the sake of growth and profitability. Some brokers have been buying hundreds of smaller agencies every year. Smaller agencies were buying each other and merging to consolidate the industry.
Now, twenty years later, the ‘Insurance Tree’ is still blooming and growing fruit, but all the low-hanging ripe fruit is already gone. If you want to participate in the harvest you must work harder to get the next set of agencies available to merge or acquire.
The major acquirers in the industry have Acquisition Officers and staffs who spend their full time visiting agencies and “making friends”. Few agencies that they visit are for sale. Most agents will politely allow the acquirer representatives to visit, thinking that there is no harm in listening. Then they are regaled with offers that are far beyond the valuations that they have received as Going Concern Values of their agencies. Many agents are flattered that their agencies are worth as much as the acquirers are offering, but are still not interested because they are counting on their earnings from the agency to sponsor their lifestyles for many more years before they are prepared to retire or consider a sale. Some agents are then offered lucrative employment agreements that seem to solve their long term compensation needs and would permit them to take advantage of a high value in the agency today. These agents may no longer be convinced that their agencies will continue to grow in value and believe the “bird in the hand” concept.