Take a Cue from the Tech Industry - Court More Buyers

As a business owner, would you be satisfied with a 1-in-100 chance of negotiating the best price for your company? Probably not. And yet, as advisors in insurance company sales across the industry, we see it happen nearly every week - one-third of all insurance agency and brokerage firms sold in one-off transactions as a result of negotiation with only one buyer. In more than 90% of single-buyer situations, agencies are being sold at a significant discount in comparison to other deals taking place in the market. Let’s look at the numbers.

Of over 500 companies actively pursuing agency acquisitions, there are presently 24 private equity-backed and 7 publicly-traded brokers who are actively pursuing new brokerages. For illustrative purposes, let’s further narrow that group down to 10 to account for external market factors. If you’ve only chosen to approach one of these insurance industry buyers, what are the odds that you have found the right one? 1 out 10 yields a 10% chance. Now, assuming you’ve gotten lucky and found the perfect buyer, what are the odds that you’ve negotiated the best deal with a firm who participates in 10 – 30 agency acquisitions per year? With the benefit of the doubt, it’s still a 1 in 10 probability, another 10% chance to negotiating the right deal. All-in-all, the likelihood of solidifying the perfect deal with the perfect buyer is 10% of 10% - or a 1% chance.

By contrast, take the technology industry, where a company rarely sells or raises capital in an environment constrained to a single suitor. Why do tech CEOs negotiate with multiple parties 99% of the time, when insurance broker CEOs do so only 66% of the time? Our guess is that while tech CEOs are experts in their space, they are aware of their limited experience in selling a business – resulting in their reliance on M&A advisors to guide them through those critical transactions. These outside advisors include a broad spectrum of potential buyers in a single company sale, creating competitive dynamics that maximize transactional value on behalf of their client.

On the other hand, insurance broker principals and owners operate on a different philosophy. Typically, these individuals are star sales professionals, making their living as brokers. So, who better to have represent them in the insurance market deal of a lifetime than, well, themselves? However, one only need to look at the odds to see how an individual representing him or herself leaves significant cash on the table.

When it comes to monetizing a lifetime’s worth of work, a one-in-one-hundred chance is less than ideal. That’s where we come in. The value of an M&A advisor is to ensure your odds get as close to 100% as possible. Interested in other ways to increase your agency value? Learn why all agency EBITDA multiples are not the same in our “A Multiple of What?” infographic.