In the entire insurance distribution environment, wholesale brokers and MGA’s make up a relatively small number of entities. But they tend to be larger in size and geographic scope and are often uniquely positioned regarding their value-added proposition, industry and coverage expertise, authority with their markets, and other factors, than retail agencies, and therefore warrant special consideration in the merger and acquisition marketplace, and when developing and implementing internal succession plans.
While most buyers are using an EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) multiple to develop pricing and value, some continue to use a price/revenue multiple. Especially with wholesalers, the quality of the operation and the risk profile of the agency are often unique, so a revenue formula valuation often breaks down or is inadequate to properly price or value the agency. Additionally, factors such as tax consequences, related businesses, real estate, employment terms following the transaction, balance sheet cut-offs, and other factors influence the price.
Additionally, the type of buyer, whether publicly-traded, private equity, or another private wholesale agency, will often present unique benefits and risks for the seller.
We’ve been involved in insurance M&A transactions since 1983, and some of the pricing metrics that were standard during much of that history, have broken down since about 2012, creating unique risks and opportunities for both buyers and sellers. Whether this environment will continue, and for how long, is an important consideration for buyers and seller.
- Wholesale agencies and MGA’s have always been, and in our opinion, will always be, attractive M&A targets.
- Sophisticated buyers are pricing on sustainable earnings and future growth, so it is in the agency’s best interest to maintain their annual organic revenue growth and their profitability at or above industry averages (5% and 25% respectively).
- Determining a preference either internal succession or sale to an outside party will drive a number of key management decisions regarding operations.
For the complete article, click here. If you need assistance as either a seller, a buyer, or in structuring an internal succession plan, our advisors can assist and have worked with wholesalers and MGA’s for over 25 years.