Brokerage and agency principals looking to sell their firms have never met more favorable market conditions, according to information from Reagan Consulting.
In a three-day workshop this week hosted by the CIAB and the American Banking Association on agent/broker mergers, acquisitions and perpetuation, the advisory group shared data suggesting that brokers are enjoying their greatest combination of growth and profitability in nearly a decade. Accordingly, deal activity is high and valuations paid for agencies and brokerage firms have “never been higher,” said Reagan Consulting CEO Bobby Reagan.
According to the firm, high deal multiples have jumped 10% over the past 18 months, with high demand among all buyer groups. Private equity buyers are particularly active, representing 43% of all acquisitions in 2014.
“These buyers are most responsible for pushing acquisition multiples to record levels,” said Kevin Stipe, president of Reagan Consulting. “With widespread buyer demand, there is nothing today to suggest that valuations will be going down any time soon.”
However, the bright outlook is not entirely unqualified.
Recruiting and retaining staff remains a top challenge for agencies and brokerage firms – particularly those hoping to perpetuate internally. Reagan Consulting suggests that 60% of agencies are under-recruiting, which is a “long-term threat to growth, profitability and perpetuation,” Stipe said.
“If you don’t have young, up-and-coming producers in your shop, perpetuation will become impossible,” he warned.
Internal perpetuation remains a goal for a significant number of agencies that are staunchly independent, reported Brian Dietz of Reagan Consulting. Passing on the agency to an internal buyer requires four elements: healthy operations, reasonable sellers, able buyers, and an effective transfer mechanism.
Of 12 metrics within these four areas that Reagan tracks, the most-critical measures affecting valuations are: organic growth, sales velocity (percentage of business that is new business), profitability, and the "Rule of 20" balance between organic growth and profitability.
More than 150 industry leaders attended the conference in Atlanta.
