Agency Prices Are Awfully High

Acquisition prices unaffordable for many agencies without Wall Street or private equity backing

Agency prices are likely at all-time highs, albeit only a handful of very specific buyers are paying such high prices. They are setting the mark, making acquisitions unaffordable for many regular agencies that do not have Wall Street money or private equity/hedge fund backing. What can an agency do to counter this trend?

First, recognize and accept reality, because by doing so, you’ll see more opportunity. The prices these buyers are paying defy gravity. For the most part, these buyers are not terribly concerned about a return in the traditional sense. They are simply looking to buy assets at one price that someone else, i.e. Wall Street or another private equity firm, values even more regardless of whether the fundamentals justify a higher valuation. A shift has occurred, just like the shift always happens in speculative bubbles – that true, verifiable, tangible profit and tangible organic growth is no longer important. All that is important is that as a buyer, you know someone else is willing to pay even more than you will pay.

One flip strategy these buyers use is to acquire $x billion and then do an initial public offering (IPO), assuming the markets stabilize at a high number. It is a bet as much as anything else, but it is a good bet because they are usually betting with someone else’s money. It’s a good gig if you can get it.

Justification for these prices, and denying they are betting, exists. However, regular agency owners should not be fooled by the funny metrics used. One of the recent metrics being used is a new form of earnings before interest, taxes, depreciation and amortization (EBITDA). The new method basically states, in U.S. Securities and Exchange Commission (SEC) filings nonetheless, that the buyer’s calculation of profit is best-defined not by any normal standard – such as a generally accepted accounting principles (GAAP)-approved standard or EBITDA (which the SEC advised investors to avoid many years ago) – but by a new version of EBITDA that states profit should be measured by EBITDA and “anything that didn’t go quite the way we wanted after we bought X agency.” I couldn’t make something up like that even if I tried.

Regardless, it is a seller’s market. If for whatever reasons you want an acquisition but you are using your own money and therefore need to make it actually cash flow, how do you compete with the astronomical prices being offered?

Not Every Seller Wants to Sell

Not every seller wants to sell only to become a cog in a big company that is going to be sold again. Keep in mind that paying this kind of high acquisition prices requires there be another buyer, and who knows what changes that buyer will make.

Furthermore, with prices that high, expenses always have to be cut. Quite often, that means valuable people are cut, little investment is made relative to new sales and working conditions are unpleasant. What is the price for this scenario?

I am not suggesting this is always the case, but it is the case for some.

Not Everyone Wants to Cash Out

Some sellers just want to be part of a bigger but locally owned organization. Take advantage of these situations.

Changing the Rules

Try changing the rules of the game.

Buy producers instead. One of the issues that some big buyers are facing is the fact that the best producers need support staff and they do not need their commissions cut to 20 percent. When this happens, the best producers are understandably disgruntled. The other producers may be disgruntled, too, but they’re not good enough for their concerns to really matter. It’s the really good producers that create an opportunity.

When taking good producers from these organizations, agencies have to play by the rules, observe all the noncompete/confidentiality language in those producers’ contracts. It may mean parking the producers for a long time to honor their contracts, but doing so is likely much less expensive than paying top price for the agency. Furthermore, you might get the best without all the junk and problems, so paying a little more makes sense.

Buy customer service representatives (CSRs) and account managers.I’m not an attorney or employment law expert. My experience, however, is that enforcing true noncompetes on CSRs is a lot more difficult than enforcing them with producers. Yet high-quality CSRs have solid relationships with clients. Additionally, like top producers, top CSRs often don’t like the spending cuts and culture of the “wealthier” buyers. Observe their contracts and don’t do anything that would place CSRs in a bad position, but it’s OK to go after these people.

Attract customers.When an agency is purchased at such a high price that expenses are cut to the bone, employees are never happy. Their lack of satisfaction is conveyed to clients if by nothing else other than their lack of engagement. If the cuts are deep enough, their dissatisfaction will be more apparent.

Customers will feel this. Customers will see the quality of service diluted. They will notice if the best people leave. Customers will be much more vulnerable to being snagged. You know many of these customers. Make a special effort to solicit them.

Insurance is a very, very small world and some of the buyers, or at least the money behind the buyers, do not understand just how small the insurance world is. Information may not be officially public, but it is well known. Take advantage of their lack of comprehension and possibly their excessive confidence that they will be able to keep all employees and all clients, regardless of how unhappy the employees, clients, and even carriers may be. It is an opportunity.