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The following report discusses our predictions for what will likely occur as H2 2024 unfolds. In it, we provide readers with a quick and simple overview of the current insurance brokerage M&A market, after which we discuss several macroeconomic and industry-specific factors that could drastically affect transactions in the next six months. Finally, we close with a few very simple suggestions for insurance agency owners about what they can do to put themselves in the best possible position to sell in H2 2024.
Insurance Brokerage M&A Report, H1 2024
The insurance brokerage M&A market consists of two seemingly opposite qualities:
Buyers are, for the first time, buying insurance brokerages at a loss
Brokerages are selling for higher multiples than ever before
In short, buyers are paying more money than ever before to purchase insurance brokerages at a loss, with only slight dips in deal volume to indicate the macroeconomic turbulence since H2 2022. This is partly because the increased resilience of insurance brokerages over the last decade has made them ideal investments for acquirers. These uneven market conditions are also due in part to an increased number of insurance M&A buyers, which is now 50+ from ~5 just a few decades earlier.
Uncertain Factors
Central to our insurance brokerage M&A report for H2 2024 is understanding what components are likely to influence the market. The following subsections detail what we feel are the most salient factors to keep in mind as we enter the back half of the year.
Interest Rates Are EXPECTED To Decrease
One of the central influences driving the decline in deal volume over the last two years has been the rise in interest rates resulting from larger macroeconomic instability. Since H2 2022, industries across the board (including insurance) have seen declines in deal volume as prospective buyers have withheld their funds for more favorable conditions in which the cost of debt is not so high.
High interest rates are expected to change, however, following the Federal Reserve’s projection of an initial drop sometime in 2024. Exactly when this rate drop will occur is still uncertain; initial projections suggested sometime this summer, however, rumors of a delay starting in April 2024 suggest that a rate cut will occur sometime later in the year.
When interest rates finally decline, either in H2 2024 or later, sellers should expect the following:
Deal volume will pick up as buyers become more aggressive. As mentioned in the H1 summary, there are currently more insurance M&A buyers than at any previous time in history. The market is already highly competitive, but it’s also limited to what buyers can afford. As rates lower and buyers can afford more, we expect a large surge in deal volume as they spend the trillions in dry powder they currently have on hold.
Buyers will become less choosy. With a greater amount of funds at their disposal and a higher level of competition, buyers are more likely to consider looking at deals they would not have otherwise considered. Our research suggests that while buyers have been paying more for brokerages, they have also been more particular about who and how they purchase. A flurry of activity is likely to widen the range of what a buyer is looking for.
Deal value & EBITDA multiples will likely see a small decline. As buyers begin to consider a greater number of deals, buyers will be less likely to spend millions more dollars competing with other acquirers, instead simply moving on to the next deal. While buyers will remain aggressive, their activity spread across a wider range of brokerages means that values will likely decline.
Possible Changes in Tax Law May Drive Transactions
H2 2021 specifically saw a small surge in deal volume because of expected increases to the laws surrounding capital gains taxes. Because the current administration is keeping this option on the table in the proposed 2025 budget, it’s entirely possible that we may see a similar surge in deal volume as brokerage owners attempt to sell their businesses before any new laws are enacted.
In the same vein, buyers may be less eager to acquire new businesses until the effects of a new law have settled in and existing finances are resolved. This, combined with a theoretical rush of sellers trying to get out of the industry, could create a buyers' market in which the current conditions that strongly favor sellers are turned on their heads. The proposed budget still has a long way to go before approval, but it is definitely something to watch moving into the back half of 2024.
What Insurance Brokerage Owners Can Do
With the challenges of H2 2024 fleshed out above, the following subsections detail the best options available to insurance agency owners to make the prospect of selling their brokerages more feasible. We offer the following three steps in order of importance.
1. Talk To An Advisor
We acknowledge our bias on this one, but the research doesn’t lie. On average, brokerages that represent themselves take home 30% less than those represented by an experienced M&A advisory firm. It is for this reason, in fact, that buyers actively seek out self-represented brokerages in the hopes of getting a better deal for their money.
When choosing an M&A advisor, consider the following:
What is their reputation? Approximately 50% of brokerages that go to market are not in a position to sell. This doesn’t stop less-than-savory advisors from representing them, effectively doing nothing while collecting money from their retainers. Consult only trusted advisors with a positive reputation in the industry.
Do they specialize in insurance? It’s easy to think that larger firms like Goldman Sachs are more likely to garner beneficial deals on behalf of their clients, but the reality is that their teams sell businesses in a wide variety of industries. This means that they often lack the specialized industry knowledge to effectively negotiate your deal. Consult data sources like S&P Global data to get an idea of a firm’s activity within the industry.
Are you meeting the firm’s principals? Larger firms may employ an extensive staff that allows them to handle larger deal volumes, but often, these deals are delegated to junior representatives who lack the experience of the firm’s principals. Smaller firms, on the other hand, provide clients with direct access to the firm’s executive team and all the experience that comes with them.
2. Read the Offer Closely
Our experience with insurance M&A transactions has taught us two central lessons that we take into every deal:
Not all equity is the same
“Multiple of what” is more important than the multiple itself
First, it’s important to understand that equity will inevitably be a part of your deal. On average, modern deal structures typically consist of about 75% equity, with only 25% in actual cash. That’s why it’s critical to have an understanding of the equity being offered, both in terms of how it’s valued as well as the type and class.
Secondly, consider what you are actually being offered a multiple of rather than just being laser-focused on the multiple itself. We often joke here that “20x0 is still 0,” and the same holds true for selling your brokerage. Consider the following fabricated offers:
“Multiple of What” Explained
Offer A | Offer B | |
Revenue | $5M | $5M |
Operational Costs | $1.5M | $.75M |
EBITDA | $3.5M | $4.25M |
Multiple | 8x | 7x |
Payout | $28,000,000 | $29,750,000 |
In the case above, company B’s offer was significantly more lucrative for the seller, despite it being a lower multiple. This is because company B had a higher initial valuation of the brokerage as well as an official valuation of the equity in their company. Understanding these qualities (or at least ensuring that your advisor does) means that you aren’t leaving money on the table post-closing.
3. Be Patient
Primarily because of the extended conversion of valuation and equity above, the M&A deal process has become significantly longer. What once transpired over 6-12 months now averages 9-18 months as advisors and buyers work out details over the initial valuation and due diligence. It is possible that deal durations may decrease if interest rates are lowered; however, this is no guarantee.
Still Uncertain? Talk to an Expert
Adaptability is key to success in M&A transactions. This insurance brokerage M&A report details several factors that might impact future transactions, but the reality is that all or none of these might happen, with other unforeseen events taking place instead. Should that happen, you want to have a partner who is adept at surviving and capitalizing on shifting markets to secure you the best possible outcome. If you want to explore the next steps for 2024, contact our team here or use the information in the section below.
About Sica | Fletcher: Sica | Fletcher is a strategic and financial advisory firm focused exclusively on the insurance industry. Founders Michael Fletcher and Al Sica are two of the industry's leading dealmakers who have advised on over $16 billion in insurance agency and brokerage transactions since 2014. According to S&P Global, Sica | Fletcher ranked as the #1 advisor to the insurance industry for 2017-2023 YTD in terms of total deals advised on. Learn more at SicaFletcher.com.
Contact: Mike Fletcher
Managing Partner, Sica | Fletcher
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