The Competitive Advantage: Agency Prices

By | November 13, 2015

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 true 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 is to acquire $x billion and then do an 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 but for the regular agency owners, do not be fooled by the funny metrics used. One of the recent metrics being used is a new form of EBITDA that basically states, in SEC filings nonetheless, and I am not making this up, that the buyer’s calculation of profit is best defined not by any normal standard, such as a GAAP approved standard and not even EBITDA (which the SEC advised investors to avoid many years ago), but a new version of EBITDA that states profit should be measured by Earnings Before Interest, Taxes, Depreciation, Amortization, 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 and 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, to pay these kinds of 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 non-compete/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 CSRs/Account Managers. I’m not an attorney or employment law expert. My experience though is that enforcing true non-competes on CSRs is a lot more difficult than enforcing them upon 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 these buyers. Again, one has to observe their contracts and definitely do nothing to place the CSRs themselves in a bad position, but why not 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 going forward. If the cuts are deep enough, their dissatisfaction will be even more apparent.

Customers will feel this. Customers will see the quality of service be diluted. Customers will notice if the best quality people leave. This means the customers are going to be much more vulnerable to be snagged. You know many of these customers. Why not 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 therefore, possibly, their excessive confidence they can keep all employees and all clients regardless of how unhappy the employees, clients, and even carriers may be. It is an opportunity.

About Chris Burand

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com. More from Chris Burand

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