Next Generation: Cost, difficulty of internal perpetuation means more M&A

The success rate for independent agency perpetuation is a dismal one, and coupled with the high cost of selling internally, M&A reigns supreme.

Insurance News

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There were 165 announced merger and acquisition transactions of independent insurance agencies in the US and Canada in the first six months of the year—a 40% jump over the year-earlier period, according to a recent report from OPTIS Partners.

The numbers indicate a positive economic climate for both buyers and sellers, as well as the continued retirement of Baby Boomer-aged agency principals.

It’s also a reflection of the fact that it’s far easier—and less expensive—for an agency principal to sell his or her agency rather than perpetuate internally, says Dan Menzer, a partner with OPTIS.

“[Succession planning] is something most agency principals are well aware of, but it can be a financially difficult process to work through, especially for a smaller agency,” Menzer said. “Hiring, developing, training and mentoring a producer into an agency owner—that’s hard and expensive. And it doesn't have a high success rate.”

In fact, Menzer estimates that as little to a quarter to a third of management trainees “work out” and go on to take over the agency principal role when the current owner retires. And because perpetuating internally is less financially rewarding for agency owners, many Baby Boomers are hesitant to invest their time and energy into training up a successor—especially those who own small agencies.

“If you’ve got 10 people in the agency, there are probably two people that actually sell. The rest of the staff supports them,” he said. “Where’s the money going to come from for that? When a quarter to a third of [new agency owners] work out, do you want to spend that money and hope it works?”

Terrence Scali, CEO of National Financial Partners Property & Casualty Insurance Services, attributes the low success rate to a “mismatch” in what makes for a good producer versus what makes for a good agency owner.

“Sometimes, paradoxically, someone who is a good producer isn’t a good agency owner. They are basically two different personality types,” Scali said. “And when you face the distractions of ownership and management, it can lead to an outcome that isn’t best for customers.”

If those low success rates are typical of the independent agency system, owners looking to perpetuate internally should start planning now—both in securing the right talent and in preparing financially, as Menzer notes “internal transactions always have lower value.”

And if rates remain unchanged in the future, a slightly different independent agency landscape will emerge. As Baby Boomer owners continue to retire, Menzer sees a 10- to 15-year window of a slowly shrinking agency system and continued M&A activity, leading to greater consolidation.

“Baby Boomers are obviously not all going to retire tomorrow,” he said. “The people who reach retirement age are going to get there over a number of years, and work their way through their 50s and 60s.

“Because selling internally is difficult and costly, they don’t always put the right plans in place. They will ultimately have to sell if they don’t have the people and structure to execute and internal transaction.”

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