Insurance agencies continue to be a hot acquisition target. There are multiple private equity backed or publicly traded agencies acquiring high quality, home grown, and often family-owned agencies for cash (and often stock) of the acquiring company at high EBITDA multiples. Local agencies are buying smaller local agencies for smaller purchase prices often based on revenues and still smaller deals where local agencies are buying books of business. Our focus here is on the larger private agencies selling to private equity backed or public company agencies.
Pro Tip: If you are looking to market your agency and you expect the purchase price to be at least $5 million you should speak to (and consider engaging) one of the leading financial advisors that primarily handle insurance agency transactions. They know the market and they will earn their fee in the additional knowledge and value they provide. BoyarMiller has the legal knowledge to represent sellers of agencies, though we are not financial advisors.
What are key considerations for a seller hoping to sell to one of these public or private equity backed acquirers?
If you are one of the fortunate sellers of a successful larger insurance agency, there may be several potential acquirers bidding for your agency. In addition to the cash purchase price paid at closing, consider whether you are willing to take a portion of the purchase price in equity of the acquiring company. You may be surprised to learn how well that equity has performed over the past years, and you may be able to defer taxes on the portion of the purchase price taken in equity.
These transactions often have additional payments during the one-to-three-year periods that follow the closing based primarily on the growth of the acquired business. These deals can be very good for agency owners who want to stick around and grow the business using the larger platform of the acquiring agency.
What acquiring agency feels best for your agency? As you get to know the interested acquirers, you may sense that one or more is a better fit than others. If you are interested in a leadership position, you may have opportunities that extend beyond just growing your own segment of the business of the acquiring agency.
Be prepared to work for the acquiring agency for a long time or even a career. All of these deals will come with a non-compete that stretches from the closing date to often five years after the closing, as well as an additional non-compete that starts with the termination of your employment with the acquiring agency and lasts for two or three years following your termination. If these acquiring agencies are going to pay big dollars, they want to make sure the business does not leave them to go with the original seller of the agency. You should expect well drafted covenants not to compete to be enforceable against the seller.
What are some deal challenges?
Make sure your producers and CSRs have strong non-piracy agreements with your agency. If you have producers with robust books of business and they are not bound by non-piracy agreements, you can’t reap the benefits of their production in your sale.
Today’s purchase agreement can be long and complicated—90 or more pages of deal description, representations, warranties, covenants, and indemnification provisions. Buyers always retain the ability to terminate a producer (including a seller). Of course, buyers don’t typically go into deals expecting to terminate a seller since a good relationship with the seller is usually a key to retaining the business, but it can happen.
How have sales contracts changed for buyers recently?
The most interesting changes in purchase contracts over the past ten or fifteen years have revolved around the increasing use of buyer equity as a portion of the purchase price. This is true not only for buyers that are publicly held, but also for the increasing number of large serial acquirers owned by private equity companies. In addition, equity of the buyer is often used as an incentive to the seller’s non-owner producers, offering some their first real opportunity to participate in the growth of the business as a whole.
How can BoyarMiller help insurance agency buyers?
BoyarMiller has over 30 years of experience as a law firm helping agents and owners of insurance agencies build and maintain the value of their businesses, especially in times of transition or sale. Our senior deal team members have a long history in representing agency sellers. While agency acquisition work is handled as a part of our merger and acquisition practice, there are unique aspects to selling an insurance agency that would not be familiar to M&A attorneys not practicing in this area. Recently, BoyarMiller’s insurance agency M&A team has handled transactions as small as a single owner as the primary producer to agencies with multiple offices, ten or more shareholders and numerous producers. Learn more.
BoyarMiller is a mid-size Houston-based law firm that advances client business goals by bringing new possibilities into focus with confidence and clarity to achieve extraordinary outcomes. Since 1990, we have been providing practical and smart business solutions. Our firm is comprised of three practice groups—corporate mergers and acquisitions, real estate, and litigation—and we serve multinational companies, middle-market businesses and entrepreneurs in need of collaborative and strategic representation. See boyarmiller.com for more information.