By DAN REYNOLDS, senior editor of Risk & Insurance®
As 2010 matured and headed to completion, companies like Itasca, Ill.-based Arthur J. Gallagher & Co. were opening up their pockets for insurance brokerages as the economy showed signs of improvement.
There had been soft pricing for brokerages in late 2009 and early in 2010, but by mid-year, buyers and sellers were starting to find some common ground.
But with unemployment still high and insurance pricing still very low, the trends are still impacting some brokerage valuations, said Bill Bohstedt, a vice president of M&A for AJG, one of the more acquisitive brokerages nationally year after year.
Other factors impacting broker valuations are at work as well.
It was feared, as summer turned to fall, that Bush-era tax cuts that held the capital gains tax at 15 percent might be allowed to expire. That turned out not to be the case as President Barack Obama and congressional Republicans worked out a deal to extend the cuts in December.
Brokerage owners might have stepped up their efforts to sell because they feared that capital gains tax would spike in 2011, according to Bohstedt. Now, sellers have at least two years to work with during which time that rate will remain the same.
Another wrinkle in the evaluation game, said Bohstedt, is a baby boomer generation of insurance brokerage owners that is gauging the fine line between being perceived as either very experienced or a bit past their prime.
"I meet with agency owners all the time who are considered Baby Boomers. I encourage them to consider joining Gallagher sooner rather than later because if they wait another five or so years, they may not be as attractive to us. We also look at the management talent that the agency owners have beneath them as a major consideration. All of these factors are important to the decision-making process."
That's Bohstedt's job: to play the timing game and try to pick up a brokerage when the owner or CEO and their company is firing on all cylinders.
Many purchases are three-year, earn-out arrangements. These deals give sellers money up front and the opportunity to earn more if the firms continue to grow in years two and three of the deal.
Sellers might want to not wait, despite the soft insurance market, and instead take Bohstedt's advice and perhaps take advantage of not only the resources a larger broker can bring to them but also the upside of earn-out arrangements they can put together while they are still attractive.
January 4, 2011
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