Anatomy of a Transaction

(Otherwise Known as “How Acquisitions Are Structured”)

Our November blog post asked how a smaller agency can take advantage of the tsunami of private equity investment in insurance brokerages. We thought it would be helpful to write a blog post outlining how acquisitions are typically structured in the current environment. The reality is that a lot has changed over the past several years, and there are many misconceptions about what these deals look like. While each of the acquirers has a slightly different way of structuring acquisitions, the common themes are as follows:

The Initial Purchase Price

In the old days, this used to be called the down payment; but the reality is that there is no such thing as the down payment any more. Barring extenuating circumstances, 100% of the “value” of the equity is usually paid at the closing of the transaction. Let’s break down how this is paid:

Valuation

• The valuation is invariably calculated as Pro Forma EBITDA multiplied by the EBITDA multiple. Note that there are two variables used, and each is as important as the other.

• Pro forma EBITDA is your firm’s most recent 12 month earnings before interest, taxes, depreciation and amortization, adjusted by a number of factors which serve to normalize your earnings stream. Due to the complexity, you should ALWAYS use an advisor to help you calculate it. The best advice here is “seller beware.” Remember, a big fat juicy multiple times zero is still zero!

• The EBITDA multiple paid is a function of your agency’s size, the current state of the market and the competitive situation in which your agency is being sold. There is no equity market fixing the multiple that your agency will sell at, and this is another reason you need to use an advisor when considering the sale of your agency.

Structure of the Consideration

• The vast preponderance of the consideration will be paid in cash at closing. Typically, a percentage of the consideration will be paid in stock of the acquirer. This is generally the same stock which is owned by senior management and the private equity investor.

• The reason stock is used is that acquirers understand they are investing in people, first and foremost. They are focused on growth, and they want the sellers of agencies to look at themselves as new partners in the acquirer whose interests are aligned with the other partners.

Growth Bonuses

Following closing, you will be paid an incentive bonus or bonuses to grow the business. Different buyers use slightly different methods to calculate these growth bonuses. The common theme is that they typically are structured as a multiple of the growth of EBITDA or revenue above a threshold over a period following closing. These growth bonuses are very valuable for a number of reasons. Immediately following closing, you will be able to take advantage of the typically higher commissions and contingencies of the buyer due to its larger size. You will have more time and opportunity to focus on growing the business rather than simply managing it. Also, these growth bonuses often include incentives for you to complete acquisitions, leveraging the buyer’s capital and attractive growth story.

Agency Management Post-Closing

Typically, the agency continues to be managed by the existing management team and, at least for a period of time, operates under its own name. Today’s acquirors operate by emphasizing a growth strategy and not an expense reduction strategy so you can continue to manage the business post-closing based on the pro forma EBITDA you presented. Depending on the acquiror and your agency’s needs, some back office functions (accounting, IT, HR, etc.) may be integrated or simply may be left alone. Concurrently, you will be able to avail yourself of the markets know-how and distribution network of the acquiror to continue to grow your business.

We hope you found this overview of “The Anatomy of a Transaction” to be helpful. We understand that we just scratched the surface of how these deals are structured. We are here to help you and answer any questions you have. Remember, our objective is to be your strategic advisor to assist you as you consider how to reposition your agency for continued growth and success while achieving your personal objectives for the business. Please do not hesitate to call us at 516.967.1958 or reach out today if you would like a consultation.

About Us

Among the brokerage community, Sica | Fletcher is well known as the leading strategic advisory firm in the U.S. that specializes in the insurance brokerage space and related industries that compliment it. In 2018, we led the country with 79 transactions completed for the insurance agents and brokers, and in 2017, we led the country with 62 closed transactions. We are also the leading advisor to the private equity firms that are most interested in investing in insurance brokerages and in the private equity sponsored agencies that have been created in recent years.

The firm was founded in 2014 by Michael Fletcher and Al Sica, two of the industry’s leading insurance M&A advisors who have closed over $6 billion in insurance agency and brokerage transactions since 2014.