Compensation, culture are key considerations for brokers looking to buy

SAN DIEGO — M&A in the insurance brokerage space is showing no signs of slowing down, as firms continue to combine in an effort to get a larger share of the market and increase their product offerings for clients.

The industry hit a record number of acquisitions last year, with 626 transactions, according to an Optis Partners report and in the first quarter of 2019 there were 51 transactions. Experts gathered at the National Association of Health Underwriters 2019 annual convention to discuss this surge in M&A activity and what to look for when buying or selling an agency.

“As the acquirer you want to pay as little as possible. If you’re looking to sell your business you need to be more informed as a seller,” Jim King, a financial planner and owner of the wealth management firm Balasa Dinverno Foltz, said during a panel.

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There are a number of factors to consider when buying and selling an agency, which King broke down as four key aspects of this acquisition process, which he calls the four C’s: clock, compensation, calculation and culture.

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Clock is for the seller to consider, thinking about how long they want to work and to whom they want to sell. It all boils down to how long you want to be in the business, “because that’s really going to lay out your time frame of when and who you should be selling to,” King noted. It will determine how the deal is structured.

Understanding what buyers are looking for is also key in these situations, according to Lily Lam, a vice president of growth at OneDigital, a health and employee benefits exclusive company. She has key requirements when looking for OneDigital’s next deal.

“Agency wise our requirements are pretty spread,” Lam said. “But for us, our target audience would be for top talent. We’re looking for those who have some gas in the tank and want to grow. We provide the infrastructure, the resources and the tools to provide you with growth for your organization. For me the ideal candidate is an organization that wants to continue to grow.”

Lam has been on both sides of this battle, having been an agency owner herself. Her company was acquired by OneDigital 4 years ago.

But not everyone is looking for the same thing in an acquisition. Michael Deagle, managing partner at BenAxis, looks for agencies where the owner is preparing for retirement and looking to find a home for their clients.

“We’re buying blocks of businesses mostly from retiring brokers,” Deagle said. “In the last year I bought two blocks of business, they both wanted to get out of the business.”

When considering the second C — compensation — it’s about how you’ll be paid and how much, King said.

“But more importantly, is that going to be enough for you personally to sustain the lifestyle you’ve lived over the course of your life, and how will that impact your family,” he added. “I always tell people to start with the big picture of what you need and don’t get overwhelmed by the market. So you really need to know what your number is.”

Culture is the third and often overlooked point, King said. The price and the buyer may be right, but if the two companies offer completely different cultures it could be detrimental to both businesses in the long run.

“What we want to figure out is, does the team you have today, where will they be,” Lam said. “Are they retiring with you or are they going to continue on. There’s a high chance that most of your team wants to stay on.”

In the case of OneDigital, Lam calls it a collaborative culture with offices in various parts of the nation offering a similar environment.

The fourth C is calculation. Sellers need to take into account overhead and other expenses, King says, as they may not realize how the earnout is calculated, another often overlooked aspect of the M&A process.

“Proforma is often misunderstood, so I would say that calculation and how you’re compensated down the road after the sale is really important,” King said.

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