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Selling an insurance brokerage is not altogether that much different than selling an insurance agency or even an insurance company. That being said, brokerage owners need to consider a.) a more diverse portfolio of policies and clients, as well as b.) specialized regulatory and licensing requirements that are different from those of insurance agencies.
This article examines the steps involved in selling an insurance brokerage, as well as critical considerations to keep in mind to ensure the greatest possible payout.
The Process of Selling an Insurance Brokerage
Selling an insurance brokerage essentially consists of six phases and spans between 8-18 months on average:
The Phases of Selling an Insurance Brokerage
Name | Description | Duration (Months) |
Initial Preparations | The brokerage owner determines their goals for selling the company and initiates improvements to increase its overall value. Finally, they select an M&A advisory firm to guide them through the rest of the process. | N/A |
Valuation | The M&A advisory firm (or sometimes a 3rd-party agency) reviews the brokerage’s important documents to determine its profitability and overall value to prospective buyers. | 1-2 |
Marketing | The M&A advisor uses their network of connections to identify the best possible buyer(s), to which they send a pitch deck containing the core information about the agency. | 3-9 |
Review | The owner and advisor review offers as they come in, determining which is best aligned with the seller’s goals. In many cases, they leverage one offer against another, creating an auction-style event. | 2-4 |
Due Diligence | Once the seller and advisor have settled on an offer, they send the valuation documents to the buyer so that they may perform a separate valuation to identify any inconsistencies. | 1-2 |
Closing | Final negotiations are made, determining the deal’s payout structure (e.g., earnouts, employment contracts, equity vs. stock) and final documents are signed, resulting in the completion of the deal. | 1 |
We should note that this process is longer than it used to be; insurance M&A transactions just a few years ago took between 6-12 months on average. However, the recent M&A market has become significantly more complicated for both buyers and sellers.
What To Keep In Mind
Selling an insurance brokerage begins before an advisor is ever brought into the picture. Initial preparations involve two factors:
Establishing the seller’s goals for the deal
Improving the value of the company
Brokerage owners typically sell for one of several reasons. The most common by far is retirement, but they could cite several additional motivations and corresponding goals. The table below outlines the most common reasons for selling an insurance brokerage as well as what each means for the resulting M&A deal.
Brokerage Owners: Motivations & Goals for M&A
Motivation | Goal |
Retirement | Maximum payout Preservation of the brokerage’s legacy |
Need Funds | Maximum payout Fastest possible closing |
Career Change | Fastest possible closing |
Transfer Ownership | Preservation of the brokerage’s legacy |
Financial Security | Maximum payout |
Obtaining the largest payout is nearly always at the top of most seller’s minds, as depicted in the table above. Although the seller’s goal does impact how each M&A transaction is conducted, it does not affect whether or not they need to improve their brokerage prior to the initial valuation.
Consider Your Policy Mix
Although improving the value of your brokerage is fundamentally the same as it is with any other business (i.e., boost your profits, cut your bottom line), doing so with a brokerage requires paying special attention to the diversity of your policy portfolio. The table below gives you a basic idea of the standard portfolio diversification benchmarks to consider, both by policy category and brokerage size.
Insurance Brokerage Policy Diversification Benchmarks
Note: The data above is based on our experience as one of the most active insurance M&A advisory firms in the industry for the last 10 years, as well as from our Sica | Fletcher index, which monitors approximately 70% of insurance M&A deals. There are cases, however, in which the numbers above may not meet the reality of an otherwise healthy brokerage.
Licensing and Fiduciary Responsibilities
Because they have a greater scope of operations, selling an insurance brokerage often involves a more heavily detailed regulatory audit of services than typically required for an agency. For example, consider the following operational differences:
Client Funds Management. Brokerages manage funds directly, in comparison to agencies, which are generally more focused on collecting premiums. When selling an insurance brokerage, this leads to a greater analysis to ensure that funds are properly protected.
Trust Accounts. Brokerages maintain separate trust accounts for client funds to ensure they are not commingled with operational funds, while agencies do not.
Fiduciary Compliance. While agencies are primarily focused on sales and service, brokerages are subject to stricter auditing requirements to ensure proper fund management.
Selling an insurance brokerage is also more difficult because of its expansive reach; while an agency is often relegated to a general area due to limited carrier relations, brokerages can work with any policy, anywhere, at any time. This leads to greater multi-state licensing concerns (e.g., scope of operation, broker/brokerage licensing, license transfer) that can also lead to more complicated deal structures when it’s time to sell.
Selecting an Advisor
Initial preparations when selling an insurance brokerage should absolutely include selecting an M&A advisory firm to represent you. Although many sellers believe they can represent themselves, the reality is that the firms that do so receive approximately 30% less than they would with appropriate representation. If you are unsure of how to select an M&A advisory firm, we strongly recommend speaking with someone on our team, but overall be sure to follow a few guidelines by answering these questions:
Does the firm specialize in insurance? Many M&A advisors like to advertise themselves as a “jack-of-all-trades” in terms of who they represent, but the reality is that insurance M&A (especially for brokerages) is incredibly nuanced. Working with an industry specialist will guarantee that no money gets left on the table when it comes time to close.
Does the firm have a good reputation? The grim reality is that approximately 50% of brokerages are not in a good position to sell, either due to their own profit margins or the state of the market. Some advisors, however, will still agree to represent them and collect retainer fees to line their own pockets at the owner’s expense. Look carefully at what other professionals have to say about the firm you are considering.
How active are the firm’s principals on deals? Although working with a large M&A firm like Goldman Sachs sounds like a flashy, white-glove experience, the reality is that these firms often hand your deal over to a junior representative who may not have the experience that a smaller firm can offer, where the principals work directly on each transaction that comes through the door.
Need More Help Selling an Insurance Brokerage
The reality is that selling an insurance brokerage is exceptionally difficult. It’s easy for even experienced owners to accidentally leave money on the table due to the complexity of insurance M&A deals. Regardless of whether or not this is your first time selling an insurance brokerage, however, it’s always a good idea to do so with an experienced M&A advisory firm like Sica | Fletcher. If you are interested in speaking with our team about next steps, reach out using our contact form here or using the contact information 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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