The Changing Landscape of M&A: Traditional Independent Agencies Struggle to Compete

The independent agency system is currently witnessing its most significant wealth transfer to date, and traditional privately owned retail independent insurance agencies are facing a disadvantage in the realm of mergers and acquisitions.

While this may initially seem like positive news for the independent agency system, there are concerns on the horizon. Internal perpetuation options within these agencies are limited, agency valuations are at an all-time high, and there has been a significant influx of private equity (PE) investment. These factors combined could lead to a major shift in the independent agency business model.

Mergers and Acquisitions

Mergers and acquisitions are an inherent aspect of the evolution of every industry, including the independent agency system. However, what stands out is the overwhelming influence of private equity (PE) firms in the M&A arena. At present, PE buyers hold a commanding 90% share of M&A activity within the independent agency system, significantly affecting the entrepreneurial drive of independent agency owners.

Traditional independent agencies are struggling to keep up with the competition posed by PE firms in the M&A game. However, there is hope for these agencies to regain their footing and remain relevant in the market.

In many cases, agency owners express a preference for selling to local retail agency competitors. However, they often find themselves ill-prepared to compete with PE firms. 

What Agents Can Do

Many agency owners pursuing growth through acquisitions are unaware of the strategies and tactics employed in today's M&A marketplace.

To get back in the game, here are four crucial changes in the market that agencies need to acknowledge:

• Involvement of M&A Advisors: For every agency owner considering a sale, it is essential to involve an advisor in the transaction. While M&A advisors have long been prevalent in large agency transactions, their role is relatively recent in small and mid-sized agencies. Bringing in an advisor guarantees fair representation for all parties involved and ultimately leads to improved outcomes.
• PE Firms Scouting for Opportunities: Expect PE firms to approach potential prospects that have long been on your radar. Be aware that the competition is fierce.
• Lump-Sum Payouts: Sellers prefer substantial upfront lump-sum payments instead of financing external transactions spread over several years. Private equity (PE) firms have established themselves as experts in providing these lucrative lump sums. However, traditional retail agencies can level the playing field by conducting meticulous due diligence on financials and books of business. Additionally, collaborating with independent agent-centric lenders can be a valuable strategy in addressing this challenge.
• Seller's Market: Sellers are no longer willing to sell their agency at a discounted price to external buyers. Therefore, be prepared for a competitive bidding process where you may need to pay the current market rate to acquire an agency.

Although PE acquisitions have been dominating the space, traditional retail independent agencies can still overcome this trend. Agency owners must be better prepared to counter the competitive advantages enjoyed by PE firms in today's marketplace. By adapting to the changing landscape and implementing effective strategies, traditional agencies can secure their position and thrive.

When you join AAI and become an independent agent, you get to launch and run the business you’ve always wanted while enjoying the additional perks of getting coached by industry experts. Contact us today to find out how we can help you achieve your goals.